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What is the value of this levered firm? EBIT is $750,000 with an unlevered cost of...

What is the value of this levered firm? EBIT is $750,000 with an unlevered cost of equity of 10%, tax rate of 21%, and the firm just issued a $1,000,000 bond with a coupon of 6%.

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Answer #1
Solution:
Value of this levered firm 6,135,000
Working Notes:
Unlevered value of the firm Vu
Vu = EBIT x (1- tax rate )/ Cost of Equity unlevered
Vu = EBIT x (1- tax rate )/R0
Vu = 750000 x (1- 0.21 )/10%
Vu = 5,925,000
Levered value of the firm VL
VL = Vu + Borrowing x tax rate
VL = 5,925,000 + 1,000,000 x 21%
VL = 5,925,000 + 210,000
VL = $6,135,000
Value of this levered firm = 6,135,000
Please feel free to ask if anything about above solution in comment section of the question.
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