et Corporation expects an EBIT of $21,000 every year forever. The company curren
ID: 2752162 • Letter: E
Question
et Corporation expects an EBIT of $21,000 every year forever. The company currently has no debt, and its cost of equity is 12 percent. The corporate tax rate is 35 percent.
What is the current value of the company? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.)
Suppose the company can borrow at 10 percent. 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.)
Suppose the company can borrow at 10 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. Round your answer to 2 decimal places, e.g., 32.16.)
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.)
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.)
et Corporation expects an EBIT of $21,000 every year forever. The company currently has no debt, and its cost of equity is 12 percent. The corporate tax rate is 35 percent.
Explanation / Answer
The value of the Unlevered Firm Vu = 21000/0.12 = $175,000 If the debt is 50% of unlevered Value The value of the debt = 0.5*175000 = 87,500. The tax advantage of debt = 0.35*87500 = 30625 Hence VL = Vu + Tax advantage of debt Hence VL = 175000 + 30625 = $205,625 If debt is 100% of unlevered Value Value of debt = 175000 The tax advantage of debt is 0.35*175000 = 61250 Hence VL = Vu + Tax advantage of debt Hence VL = 175000 + 61250 = $236,250 If debt is 50% of its levered value The value of the debt = 0.5*236250 = 118125 The tax advantage of debt is 0.35*118125 = 41,343.75 Hence VL = 236250 + 41343.75= $277,593.75 If debt is 100% of its levered value The value of the debt = 1*236250 = 236250 The tax advantage of debt is 0.35*236250 = 82687.5 Hence VL = 236250+82687.5 = $318,937.5
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