Janetta Corp. has an EBIT of $1,065,000 per year that is expected to continue in

Question

Janetta Corp. has an EBIT of $1,065,000 per year that is expected to continue in perpetuity. The unlevered cost of equity for the company is 16 percent, and the corporate tax rate is 35 percent. The company also has a perpetual bond issue outstanding with a market value of $2.1 million.

What is the value of the company? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

What is the value of the company? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Explanation / Answer

Unlevered value of the firm = EBIT x (1-t)/ Re

                                                       = 1,065,000 x (1-0.35)/0.16

                                                       =4,326,562.50

Levered value of the firm = unlevered value + Debt x tax rate

                                                   = 4,326,562.50 +2,100,000 x 0.35

                                                    = 5,061,562.50

Hence, the value of the firm would be 5,061,562.50.

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