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 | $ |
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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