Question

Bassett Fruit Farm expects its EBIT to be $333,000 a year forever. Currently, the firm has...

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?

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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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