Letang Corporation expects an EBIT of $22,750 every year forever. The company cu
ID: 2750657 • Letter: L
Question
Letang Corporation expects an EBIT of $22,750 every year forever. The company currently has no debt, and its cost of equity is 14 percent. The company can borrow at 8.5 percent and the corporate tax rate is 40.
What is the current value of the company? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)
(a) 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. Round your answer to 2 decimal places (e.g., 32.16).)
(b) 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. Round your answer to 2 decimal places (e.g., 32.16).)
(a) What will the value of the firm be if the company takes on debt equal to 50 percent of its levered value?(Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)
(b) 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. Round your answer to 2 decimal places (e.g., 32.16).)
Letang Corporation expects an EBIT of $22,750 every year forever. The company currently has no debt, and its cost of equity is 14 percent. The company can borrow at 8.5 percent and the corporate tax rate is 40.
Explanation / Answer
Requirement 1
Current value of company = EBIT ( 1 - Tax rate) / Cost of equity
= 22750 ( 1 - 0.40) / 0.14
= 13650 / 0.14
= $ 97500
Conclusion:- Current value of company = $ 97500 (Unlevered firm)
Requirement 2
a) Debt = 50 % of 97500
Debt = 48750
Value of firm = Value of unlevered firm + Amount of debt * Tax rate
= 97500 + 48750 * 0.40
= $ 117000
Conclusion:- The value of the firm would be $ 117000 if the company takes on debt equal to 50 percent of its unlevered value
Requirement 2
(b)
Debt = 100 % of 97500
Debt = 97500
Value of firm = Value of unlevered firm + Amount of debt * Tax rate
= 97500 + 97500 * 0.40
= $ 136500
Conclusion:- The value of the firm would be $ 136500 if the company takes on debt equal to 100 percent of its unlevered value.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.