Cavo Corporation expects an EBIT of $15,600 every year forever. The company curr

Question

Cavo Corporation expects an EBIT of $15,600 every year forever. The company currently has no debt, and its cost of equity is 10 percent The corporate tax rate is 35 percent a. What is the current value of me company? (Round your answer to 2 decimal places. (e.g., 32.16)) b-1 Suppose the company can borrow at 7 percent What will the value of the firm be if the company takes on debt equal to 40 percent of its unlevered value? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) b-2 Suppose The company can borrow at 7 percent What will the value of The firm be if the company takes on debt equal to 100 percent of its unlevered value? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) c-1 What will The value of the firm be if the company takes on debt equal to 40 percent of its levered value? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) c-2 What will the value of the firm be if the company takes on debt equal to 100 percent of its levered value? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Explanation / Answer

Answer for question no.a:

Given EBIT of the company is $15,600 in perpetuity.

Cost of capital =10%.=i

Formula for calculation of value of the firm in case of perpetual EBIT = EBIT*(1-t)/i

Answer for question on.b1:

Value of debt = 40% of value of the unlevered firm

=$40,560

Therefore value of levered firm with 40% of debt of the over all capital when the firm is unlevered.

Answer for question on.b2:

If 100% of unlevered value is taken as debt i..,e value of debt =$101,400 @ 7% interest rate.

Particulars Unlevered EBIT $15,600.00 Interest $0.00 EBT $15,600.00 Tax $5,460.00 Profit after tax $10,140.00 Cost of equity 10% Value of unlevered firm $101,400.00

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