Hunter Corporation expects an EBIT of $59,000 every year forever. The company currently has no debt and its cost of equity is 11 percent. The corporate tax rate is 24 percent. |
a. |
What is the current value of the company? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
b-1. | Suppose the company can borrow at 7 percent. What will the value of the company be if takes on debt equal to 40 percent of its unlevered value? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
b-2. | Suppose the company can borrow at 7 percent. What will the value of the company be if takes on debt equal to 100 percent of its unlevered value? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
c-1. | What will the value of the company be if takes on debt equal to 40 percent of its levered value? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
c-2. | What will the value of the company be if takes on debt equal to 100 percent of its levered value? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
a)
Current value of company = EBIT * (1 - t) / WACC
= $59,000 * (1 - 0.24) / 0.11
= $44,840 / 0.11
= $407,636.36
Current value of company = $407,636.36
b-1)
Value of the company = $407,636.36 + ($407,636.36 * 24% *
40%)
= $446,769.45
b-2)
Value of the company = $407,636.36 + ($407,636.36 * 24% *
100%)
= $505,469.09
c-1)
Value of the company = $407,636.36 / (1 - (24% * 40%)) = $450,925.18
c-2)
Value of the company = $407,636.36 / (1 - (24% * 100%)) = $536,363.64
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