Question

L.A. Clothing has expected earnings before interest and taxes of $2,300, an unlevered cost of capital...

L.A. Clothing has expected earnings before interest and taxes of $2,300, an unlevered cost of capital of 12 percent and a tax rate of 33 percent. The company also has $2,900 of debt that carries an 8 percent coupon. The debt is selling at par value. What is the value of this firm?

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Answer #1

Given,

EBIT = $2300

Unlevered cost of capital = 12% or 0.12

Tax rate = 33% or 0.33

Debt = $2900

Solution :-

Unlevered value = [EBIT x (1 - tax rate)] unlevered cost of capital

= [$2300 x (1 - 0.33)] 0.12

= [$2300 x 0.67] 0.12

= $1541 0.12 = $12841.67

Value of the firm = Unlevered value + (debt x tax rate)

= $12841.67 + ($2900 x 0.33)

= $12841.67 + $957 = $13798.67

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