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Tool Manufacturing has an expected EBIT of $65,000 in perpetuity and a tax rate of 22...

Tool Manufacturing has an expected EBIT of $65,000 in perpetuity and a tax rate of 22 percent. The company has $118,000 in outstanding debt at an interest rate of 6.2 percent and its unlevered cost of capital is 12 percent.

  

What is the value of the company according to MM Proposition I with taxes?
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Answer #1

According to MM Proposition I with taxes, the value of a firm is equal to the value of un-levered firm plus the tax shield on the total value of debt.

That is:

Where,
Vs = Value of the firm
Vul = Value of the un-levered firm
t = tax rate

Now,

Where ke is the cost of capital

Therefore,

Now, that we have value of un-levered firm, we can find the value of the company.

Therefore,

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