Cede & Co. expects its EBIT to be $91,000 every year forever. The firm can borro

ID: 2797468 • Letter: C

Question

Cede & Co. expects its EBIT to be $91,000 every year forever. The firm can borrow at 4 percent. Cede 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 firm? (Do not round intermediate calculations and round your answer to 2 decimal places (e.g., 32.16).) 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).)

Explanation / Answer

value of equity with no debt

EBIT

91000

less tax 35%

31850

EAT

59150

cost of equity

11%

value of equity

EAT/cost of equity

59150/11%

537727.3

value of equity with debt of 136000

value of levered firm

value of unlevered fim+(tax shield on amount borrowed)

537727.3 +(136000*.35)

585327.3