Question

Bassett Fruit Farm expects its EBIT to be $333,000 a year forever.
Currently, the firm has no debt. The cost of equity is 12.2 percent
and the tax rate is 35 percent. The company is in the process of
issuing $2.2 million worth of bonds at par that carry an annual
coupon of 5.8 percent. What is the unlevered value of the
firm?

Answer #1

**SOLUTION:**

**The values provided in the
question are as follows:**

Bassett Fruit Farm expects its EBIT = $333,000 a year forever.

Currently, the firm has no debt.

The cost of equity = 12.2 percent or 0.122

Tax rate=35 percent or 0.35

The company is in the process of issuing $2.2 million worth of bonds at par that carry an annual coupon of 5.8 percent.

Unlevered value of the firm =?

**The formula is to calculate
unlevered value of the firm is as follows:**

Unlevered value of the firm= [EBIT * (1 - Tax rate)] /Cost of equity

Using the values,

Unlevered value of the firm =$333,000 * (1-0.35)/0.122

Unlevered value of the firm =[$333,000*0.65]/0.122

Unlevered value of the firm =$216,450/0.122

**Unlevered value of the firm
=$1,774,180.33**

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