Question 9 (of 14) Bruce & Co. expects its EBIT to be S91,000 every year forever

Question

Question 9 (of 14) Bruce & Co. expects its EBIT to be S91,000 every year forever. The company can borrow at 4 percent. The company currently has no debt, and its cost of equity is 11 percent. If the tax rate is 35 percent, what is the value of the company? (Do not round and round your answer to 2 decimal places, e.g., 32.16.) Value of the company intermediate calculations What will the value be if the company borrows $136,000 and uses the proceeds to repurchase shares? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Value of the comapny eBook & Resources eBook 16 5 Taxes

Explanation / Answer

Answer a.

EBIT = $91,000
Cost of Equity = 11%
tax rate = 35%

Value of Firm, VU = EBIT * (1 - tax) / Cost of Equity
Value of Firm, VU = $91,000 * (1 - 0.35) / 0.11
Value of Firm, VU = $537,727.27

So, value of the Firm is $537,727.27

Answer b.

Debt = $136,000
Value of Unlevered Firm, VU = $57,727.27
tax rate = 35%

Value of Firm, VL = VU + tax*Debt
Value of Firm, VL = $57,727.27 + 0.35 * $136,000
Value of Firm, VL = $105,327.27

So, value of firm is $105,327.27

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