P16-16 M&M [LO2] Tool Manufacturing has an expected EBIT of $64,000 in perpetuit

Question

P16-16 M&M [LO2]

Tool Manufacturing has an expected EBIT of $64,000 in perpetuity, and a tax rate of 35 percent. The firm has $95,000 in outstanding debt at an interest rate of 8.5 percent, and its unlevered cost of capital is 15 percent. The value of the firm is $                      according to M&M Proposition I with taxes. (Note: First calculate the value of the unlevered firm and then calculate the value of the levered firm.) (Do not include the dollar sign ($). Round your answer to 2 decimal places. (e.g., 32.16))

references

Tool Manufacturing has an expected EBIT of $64,000 in perpetuity, and a tax rate of 35 percent. The firm has $95,000 in outstanding debt at an interest rate of 8.5 percent, and its unlevered cost of capital is 15 percent. The value of the firm is $                      according to M&M Proposition I with taxes. (Note: First calculate the value of the unlevered firm and then calculate the value of the levered firm.) (Do not include the dollar sign ($). Round your answer to 2 decimal places. (e.g., 32.16))

Explanation / Answer

EBIT =

EBIT = $64,000 Tax rate = 35% Debt = $95,000 Interest rate = 8.5% Unlevered Cost of Capital = 15% Proposition 1 Value of (Levered Firm) = Value of unlevered firm + Tax rate * Debt Value of Unlevered Firm = X(1

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