Cavo Corporation expects an EBIT of $25,250 every year forever. The company curr

Question

Cavo Corporation expects an EBIT of $25,250 every year forever. The company currently has no debt, and its cost of equity is 12 percent. The corporate tax rate is 35 percent.

What will the value of the firm be if the company takes on debt equal to 40 percent of its levered value?

Cavo Corporation expects an EBIT of $25,250 every year forever. The company currently has no debt, and its cost of equity is 12 percent. The corporate tax rate is 35 percent.

What will the value of the firm be if the company takes on debt equal to 40 percent of its levered value?

Explanation / Answer

PAT =25250*(1-0.35) = 16412.5

Value of Equity (Perpetual PAT) =16412.5/0.12 =136770.833

Value of debt =0.4*136770.833 =54708.3332

New Value of Firm =54708.3332+ 136770.833 =191479.166

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