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P16-14 M&M and Taxes [LO2] Frederick & Co. expects its EBIT to be $92,000 every

ID: 2643030 • Letter: P

Question

P16-14 M&M and Taxes [LO2]

Frederick & Co. expects its EBIT to be $92,000 every year forever. The firm can borrow at 9 percent. Frederick currently has no debt, and its cost of equity is 15 percent. If the tax rate is 35 percent, the value of the firm is $             . The value will be $             if Frederick borrows $60,000 and uses the proceeds to repurchase shares. (Do not include the dollar signs ($). Round your answers to 2 decimal places. (e.g., 32.16))

Frederick & Co. expects its EBIT to be $92,000 every year forever. The firm can borrow at 9 percent. Frederick currently has no debt, and its cost of equity is 15 percent. If the tax rate is 35 percent, the value of the firm is $             . The value will be $             if Frederick borrows $60,000 and uses the proceeds to repurchase shares. (Do not include the dollar signs ($). Round your answers to 2 decimal places. (e.g., 32.16))

Explanation / Answer

Answer..

value of unleverd firm=ebit(1-tax)/ke*100                                              =92000(1-.35)/15*100 398667