Cavo Corporation expects an EBIT of $30,800 every year forever. The company curr

Question

Cavo Corporation expects an EBIT of $30,800 every year forever. The company currently has no debt, and its cost of equity is 14 percent. The corporate tax rate is 35 percent. a. What is the current value of the company? (Round your answer to 2 decimal places. (e.g., 32.16)) Current value $ b-1 Suppose the company can borrow at 9 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 and round your final answer to 2 decimal places. (e.g., 32.16)) Value of the firm $ b-2 Suppose the company can borrow at 9 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 $ c-1 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 and round your final answer to 2 decimal places. (e.g., 32.16)) Value of the firm $ 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 $

What is the current value of the company? (Round your answer to 2 decimal places. (e.g., 32.16))

Suppose the company can borrow at 9 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 and round your final answer to 2 decimal places. (e.g., 32.16))

Suppose the company can borrow at 9 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))

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 and round your final 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 and round your final answer to 2 decimal places. (e.g., 32.16))

What is the current value of the company? (Round your answer to 2 decimal places. (e.g., 32.16))

Explanation / Answer

A What is the current value of the company

With no debt, we are finding the value of an unlevered firm, so:

VU

= $30800(1 - 0.35)/0.14

=$143,000

B-1 Suppose the company can borrow at 9 percent. What will the value of the firm be if the company takes on debt equal to 50 percent of its unlevered value?
If debt is 50 % of VU, then D = (0.50) VU,

and we have:•VL= VU+ TC[(.50)VU]

VL

= $143000 + 0.35(71500)

=$168025

B-2 Suppose the company can borrow at 9 percent. What will the value of the firm be if the company takes on debt equal to 100 percent of its unlevered value

If debt is 100 % of VU, then D = (0.50) VU,

and we have:•VL= VU+ TC[(1)VU]

VL

= $143000 + 0.35(143000)

=$193050

C1 What will the value of the firm be if the company takes on debt equal to 50 percent of its levered value

According to M&M Proposition I with taxes

VL= VU+ TCD

With debt being 50% of the value of the levered firm,D must equal (0.50)VL,

so:VL= VU+ TC[(.50)VL]

VL= $143000 + 0.35(0.50)(VL)

= $173333.33

C2

What will the value of the firm be if the company takes on debt equal to 100 percent of its levered value

If the debt is 100% of the levered value, D must equalVL,

so:VL= VU+ TC[(1)(VL]

VL= $143000+ 0.35(1.0)(VL)

= $220000

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