Pnice af bonal aday PVA Pi 19 Axada Company has debt-to-equity ratio of 0.40. Th

Question

Pnice af bonal aday PVA Pi 19 Axada Company has debt-to-equity ratio of 0.40. The required rate of return on the company's unlevered equity is 14%, and the pre-tax cost of debt is 5 %. Sales revenue for the company is expected to remain stable indefinitely at last year's level of £20,500,000. Variable costs amount to 60% of sales. The tax rte is 28%, and the company distributes all earnings as dividend at the end of each year. If the company were financed entirely by equity, how much would it be worth? (a) £42,171,429. (b) £58,571,429. (c) £63,234,200. (d) £87,857,143. (e) I choose not to answer. 20.

Explanation / Answer

Axada Company Ans (A) Sales £ 20,500,000.00 Variable Expenses £ 12,300,000.00 Earnings before tax £    8,200,000.00 Tax=(8200000*28%) £    2,296,000.00 Cost of Equity= 0.14 Earnings after tax £    5,904,000.00 Value of Unlevered firm=(Earnings after tax/Cost of Equity)=(5904000/.14) £        42,171,429

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