Question

The Eccles Inc., a zero growth firm, has an expected EBIT of $408,750 and a corporate tax rate of 30%. Eccles uses $400,000 of 12.0% debt, and the cost of equity to an unlevered firm in the same risk class is 16.0%. What is the value of the firm according to the MM model with corporate taxes?

Answer #1

**Given,**

**EBIT = $408750**

**Tax rate = 30% or 0.30**

**Debt = $400000**

**Cost of debt = 12% or 0.12**

**Cost of equity = 16% or 0.16**

**Solution :-**

**Value of unlevered firm = [EBIT x (1 - tax rate)]
cost of equity**

**= [$408750 x (1 - 0.30)]
0.16**

**= [$408750 x 0.70]
0.16**

**= $286125
0.16 = $1788281.25**

**Now,**

**Value of the firm = Value of unlevered firm + (debt x
tax rate)**

**= $1788281.25 + ($400000 x 0.30)**

**= $1788281.25 + $120000 = $1908281.25**

Eccles
Inc.
Eccles Inc., a zero
growth firm, has an expected EBIT of $100,000 and a corporate tax
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equity to an unlevered firm in the same risk class is 16.0%.
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a.
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