Mojito Mint company has a debt-equity ratio of .35. The required return on the c

Question

Mojito Mint company has a debt-equity ratio of .35. The required return on the company's unlevered equity is 12.8 percent, and the pretax cost of the firm's debt is 6.5 percent. Sales revenue for the company is expected to remain stable indefinitely at the last year's level of $17,500,000. Variable costs amount to 60 percent of sales. The tax rate is 40 percent, and the company distributes all its earnings as dividends at the end of each year. If the company were financed entirely by equity, how much it be worth?

A. $32,812,500

B. $32,124,500

C. $31,221,500

D. $32,188,500

Explanation / Answer

The answer is A $ 32,812,500

Sales revenue          17,500,000 Variable costs          10,500,000 EBIT            7,000,000 taxes at 40%            2,800,000 Unlevered after tax earnings            4,200,000 Return on equity 12.8% Worth of equity          32,812,500

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