Cavo Corporation expects an EBIT of $30,800 every year forever. The company curr

Question

Cavo Corporation expects an EBIT of $30,800 every year forever. The company currently has no debt, and its cost of equity is 14 percent. The corporate tax rate is 35 percent.

What is the current value of the company? (Round your answer to 2 decimal places. (e.g., 32.16))

Suppose the company can borrow at 9 percent. What will the value of the firm be if the company takes on debt equal to 50 percent of its unlevered value? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Cavo Corporation expects an EBIT of $30,800 every year forever. The company currently has no debt, and its cost of equity is 14 percent. The corporate tax rate is 35 percent.

Explanation / Answer

Answer:

a. Current value of the Firm = Net Income / Rate of return = EBIT (1- Tax) / Rate to return

= $30800 (1-0.35) / 0.14 = $143000

b. Debt to be taken = $143000*50% = $71500

Interest on debt = $71500 *9% = $6435

EBIT

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