Cavo Corporation expects an EBIT of $15,600 every year forever. The company curr
ID: 2743670 • Letter: C
Question
Cavo Corporation expects an EBIT of $15,600 every year forever. The company currently has no debt, and its cost of equity is 10 percent. The corporate tax rate is 35 percent.
Please correct the wrong answers.
a. What is the current value of the company? (Round your answer to 2 decimal places. (e.g., 32.16)) Current value $ 1 101400 b-1 Suppose the company can borrow at 7 percent. What will the value of the firm be if the company takes on debt equal to 40 percent of its unlevered value? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Value of the firm 40560 b-2 Suppose the company can borrow at 7 percent. What will the value of the firm be if the company takes on debt equal to 100 percent of its unlevered value? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Levered value 115596 c-1 What will the value of the firm be if the company takes on debt equal to 40 percent of its levered value? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Value of the firm 55263 | * c-2 What will the value of the firm be if the company takes on debt equal to 100 percent of its levered value? (Do not round intermediate calculations and round your final answer to 2 decimal places (e.g., 32.16) Levered value 90753 3Explanation / Answer
Given EBIT = $15,600.
Value of debt is zero. , Corporate tax rate is 35%.
Cost of equity = 10%
a) Calculation of value of company:
Particulars
Currency $
EBIT
$ 15,600.00
LESS: Interest on debt
$ -
EBT
$ 15,600.00
LESS: Tax@35%
$ 5,460.00
EAT
$ 10,140.00
Value of unlevered Company
$ 1,01,400.00
b-1) Calculation of value of firm:
Companies debt is 40% of unlevered value
$ 40,560.00
Value of firm
$ 1,15,596.00
Particulars
Currency $
EBIT
$ 15,600.00
LESS: Interest on debt @7%
$ 2,839.20
EBT
$ 12,760.80
LESS: Tax@35%
$ 4,466.28
EAT
$ 8,294.52
Value of Company as computed above
$ 1,15,596.00
b-2) Calculation of the value of the firm
Value of debt @100 % of its unlevered value
$ 1,01,400.00
Value of the Levered firm
$ 1,36,890.00
C-1) Calculation of the value of the firm
Value of the Levered firm
$ 1,36,890.00
Value of debt @40 % of its levered value
$ 54,756.00
Value of the firm
$ 1,20,564.60
C-2) Calculation of the value of the firm
Value of the Levered firm
$ 1,36,890.00
Value of debt @100 % of its levered value
$ 1,36,890.00
Value of the firm
$ 1,49,311.50
a) Calculation of value of company:
Particulars
Currency $
EBIT
$ 15,600.00
LESS: Interest on debt
$ -
EBT
$ 15,600.00
LESS: Tax@35%
$ 5,460.00
EAT
$ 10,140.00
Value of unlevered Company
$ 1,01,400.00
b-1) Calculation of value of firm:
Companies debt is 40% of unlevered value
$ 40,560.00
Value of firm
$ 1,15,596.00
Particulars
Currency $
EBIT
$ 15,600.00
LESS: Interest on debt @7%
$ 2,839.20
EBT
$ 12,760.80
LESS: Tax@35%
$ 4,466.28
EAT
$ 8,294.52
Value of Company as computed above
$ 1,15,596.00
b-2) Calculation of the value of the firm
Value of debt @100 % of its unlevered value
$ 1,01,400.00
Value of the Levered firm
$ 1,36,890.00
C-1) Calculation of the value of the firm
Value of the Levered firm
$ 1,36,890.00
Value of debt @40 % of its levered value
$ 54,756.00
Value of the firm
$ 1,20,564.60
C-2) Calculation of the value of the firm
Value of the Levered firm
$ 1,36,890.00
Value of debt @100 % of its levered value
$ 1,36,890.00
Value of the firm
$ 1,49,311.50
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