P16-14 M&M and Taxes [LO2] Frederick & Co. expects its EBIT to be $90,000 every

Question

P16-14 M&M and Taxes [LO2]

Frederick & Co. expects its EBIT to be $90,000 every year forever. The firm can borrow at 8 percent. Frederick currently has no debt, and its cost of equity is 20 percent. If the tax rate is 34 percent, the value of the firm is $. The value will be $ if Frederick borrows $59,000 and uses the proceeds to repurchase shares. (Do not include the dollar signs ($). Round your answers to 2 decimal places. (e.g., 32.16))

Frederick & Co. expects its EBIT to be $90,000 every year forever. The firm can borrow at 8 percent. Frederick currently has no debt, and its cost of equity is 20 percent. If the tax rate is 34 percent, the value of the firm is $. The value will be $ if Frederick borrows $59,000 and uses the proceeds to repurchase shares. (Do not include the dollar signs ($). Round your answers to 2 decimal places. (e.g., 32.16))

Explanation / Answer

V = EBIT(1-tc)/Ru

= 90000(1-0.34)/0.20

= 297000

b) V = Vu+t_c*d

= 297000+0.34(59000)

= 317060

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