Question

Meyer & Co. expects its EBIT to be $66,000 every year forever. The firm can borrow...

Meyer & Co. expects its EBIT to be $66,000 every year forever. The firm can borrow at 8 percent. Meyer currently has no debt, and its cost of equity is 14 percent.

  

If the tax rate is 35 percent, what is the value of the firm? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.)

  

  Value of the firm $   

  

What will the value be if the company borrows $140,000 and uses the proceeds to repurchase shares? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.)

  

  Value of the firm $   

Homework Answers

Answer #1

Ans 01 :

EBIT =   $66,000

Tax Rate = 35% = 0.35

Cost of Equity = 14% = 0.14

Value of the Unlevered firm =   

=306,428.57

Value of the Unlevered firm = 306,428.57 Ans

Ans 02 :

Value of Levered Firm = Value of the Unlevered firm + Value of Debt

Value of Debt = Debt * Tax Rate =  $140,000 * 35% = 49,000

Value of Levered Firm = 306,428.57 + 49,000 = 355,428.57 (Ans)

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