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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