P16-16 M&M [LO2] Tool Manufacturing has an expected EBIT of $39,000 in perpetuit

Question

P16-16 M&M [LO2]

Tool Manufacturing has an expected EBIT of $39,000 in perpetuity, and a tax rate of 35 percent. The firm has $64,000 in outstanding debt at an interest rate of 11 percent, and its unlevered cost of capital is 16 percent. The value of the firm is $ according to M&M Proposition I with taxes. (Do not include the dollar sign ($). Round your answer to 2 decimal places. (e.g., 32.16))

Tool Manufacturing has an expected EBIT of $39,000 in perpetuity, and a tax rate of 35 percent. The firm has $64,000 in outstanding debt at an interest rate of 11 percent, and its unlevered cost of capital is 16 percent. The value of the firm is $ according to M&M Proposition I with taxes. (Do not include the dollar sign ($). Round your answer to 2 decimal places. (e.g., 32.16))

Explanation / Answer

V_u = EBIT(1-t_c)/R_u

= 39000(1-0.35)/0.11

= 230454.5

V_L = V_u+t_c*D

= 230454.5+0.35(64000)

= 252854.5

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