O’Connell & Co. expects its EBIT to be $61,000 every year forever. The firm can
ID: 2654468 • Letter: O
Question
O’Connell & Co. expects its EBIT to be $61,000 every year forever. The firm can borrow at 7 percent. O’Connell currently has no debt, and its cost of equity is 14 percent.
If the tax rate is 35 percent, what is the value of the firm? (Round your answer to 2 decimal places. (e.g., 32.16))
What will the value be if the company borrows $148,000 and uses the proceeds to repurchase shares? (Round your answer to 2 decimal places. (e.g., 32.16))
If the tax rate is 35 percent, what is the value of the firm? (Round your answer to 2 decimal places. (e.g., 32.16))
Explanation / Answer
Answer:
1
Calculation of value of firm
EBIT
$ 61,000.00
Less: Interest
$ -
EBT
$ 61,000.00
Less: Tax @35%
$ (21,350.00)
EAT (A)
$ 39,650.00
Cost of Equity (B)
14%
Value of Firm =A/B
$ 283,214.29
1
Calculation of value of firm
EBIT
$ 61,000.00
Less: Interest (148000*7%)
$ (10,360.00)
EBT
$ 50,640.00
Less: Tax @35%
$ (17,724.00)
EAT (A)
$ 32,916.00
Cost of Equity (B)
14%
Value of Firm =A/B
$ 235,114.29
1
Calculation of value of firm
EBIT
$ 61,000.00
Less: Interest
$ -
EBT
$ 61,000.00
Less: Tax @35%
$ (21,350.00)
EAT (A)
$ 39,650.00
Cost of Equity (B)
14%
Value of Firm =A/B
$ 283,214.29
1
Calculation of value of firm
EBIT
$ 61,000.00
Less: Interest (148000*7%)
$ (10,360.00)
EBT
$ 50,640.00
Less: Tax @35%
$ (17,724.00)
EAT (A)
$ 32,916.00
Cost of Equity (B)
14%
Value of Firm =A/B
$ 235,114.29
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