hm tpx Fall 2017 Corporation Finance (For US 8 10.00 points Calvert Corporation
ID: 2789612 • Letter: H
Question
hm tpx Fall 2017 Corporation Finance (For US 8 10.00 points Calvert Corporation expects an EBIT of $21.250 every year forever The company curently has no debt and its cost of oquty s 140 percent The company can borrow at percent and the corporale tax e a. What is the current value of the company? (Do not round intermediate calculations and round your ans to 2 decinal places, eg,32.%) b. What will he value of the frm be i the company takes on debt equal to 50 percent of its Value of the firm What will the valuo of the firm be d the company lakes on debt equal to 100 percent of ts unlevered vaue? Do not r value of the firm S not round intermediate caleutations and round your answer to 2 dectnal places.o, 3216 ound intermediate catcuilatons and round Value of the fm value of the firm S Type here to search 11/20/201Explanation / Answer
Calvert Corporation a.What is the current value of the firm ? With no debt, we are basically finding the value of the unlevered firm V UL = EBIT [1 - t]/k ul = $21,250(.60)/.14 = $12,750/.14 = $91,071.43 b.What will be the value of firm be if the company takes on debt equal to 50 percent of its unlevered value? With debt, we simply need to use the equation for the value of a levered firm. With 50% debt, half of the firm’s value is tied up in debt, so the value of the firm is: V = V UL + Tax rate x B {Debt} = $91,071.43 + .40 x ($91,071.43/2) V = $91,071.43 + $18,214.29 = $109,285.7 What will be the value of firm be if the company takes on debt equal to 100 percent of its unlevered value? With 100% debt, the value of the firm is: V = $91,071.43 + .40($91,071.43) = $127,500 c.What will be the value of firm be if the company takes on debt equal to 50 percent of its levered value? V L = V U + t C B With debt being 50 percent of the value of the levered firm, D must equal (.50) V L , so: V L = V U + T [(.40) V L ] V L = $91,071.43 + .40(.50)( V L ) V L = $113,839.3 What will be the value of firm be if the company takes on debt equal to 1000 percent of its levered value? If the debt is 100 percent of the levered value, D must equal V L , so: V L = V U + T [(1) V L ] V L = $91,071.43 + .40(1)( V L ) V L = $151,785.7
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