Question

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%.

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

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.
0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Ajax has a tax rate of 30% and an EBIT of $50 million. The unlevered cost...
Ajax has a tax rate of 30% and an EBIT of $50 million. The unlevered cost of capital is 14%. a) What is the value of the unlevered firm? What is the cost of equity for the unlevered firm? What is the WACC of the unlevered firm? b) Now suppose that Ajax issues $90 million in debt to buy back stock. The cost of debt is 8%. For the levered firm, find the value of the levered firm, the cost...
An unlevered firm has a value of $750 million. An otherwise identical but levered firm has...
An unlevered firm has a value of $750 million. An otherwise identical but levered firm has $40 million in debt at a 6% interest rate. Its cost of debt is 6% and its unlevered cost of equity is 10%. After Year 1, free cash flows and tax savings are expected to grow at a constant rate of 3%. Assuming the corporate tax rate is 40%, use the compressed adjusted present value model to determine the value of the levered firm....
An unlevered firm has a value of $700 million. An otherwise identical but levered firm has...
An unlevered firm has a value of $700 million. An otherwise identical but levered firm has $40 million in debt at a 6% interest rate. Its cost of debt is 6% and its unlevered cost of equity is 10%. After Year 1, free cash flows and tax savings are expected to grow at a constant rate of 2%. Assuming the corporate tax rate is 35%, use the compressed adjusted present value model to determine the value of the levered firm....
You are considering two identical firms, one levered and the other unlevered. Both firms have expected...
You are considering two identical firms, one levered and the other unlevered. Both firms have expected EBIT of $21000. The value of the unlevered firm (VU) is $120000. The corporate tax rate is 30%. The cost of debt is 9%, and the ratio of debt to equity is 1 for the levered firm. Use Modigliani and Miller's (1963) propositions in a world without bankruptcy, what is the value of the levered firm?
Find the value of levered equity for this firm. Assume the firm has perpetual cash flows....
Find the value of levered equity for this firm. Assume the firm has perpetual cash flows. Use Miller & Modigiiani's Proposition II concerning the cost of equity. You have the following information about the firm: EBIT = $100 million Tax rate - 35% Debt = $150 million Cost of debt = 8% Unlevered cost of capital = 12%
An unlevered firm has a value of $800 million. An otherwise identical but levered firm has...
An unlevered firm has a value of $800 million. An otherwise identical but levered firm has $40 million in debt at a 4% interest rate. Its cost of debt is 4% and its unlevered cost of equity is 12%. After Year 1, free cash flows and tax savings are expected to grow at a constant rate of 3%. Assuming the corporate tax rate is 40%, use the compressed adjusted present value model to determine the value of the levered firm....
You are considering two identical firms, one levered and the other unlevered. Both firms have expected...
You are considering two identical firms, one levered and the other unlevered. Both firms have expected EBIT of $21000. The value of the unlevered firm (VU) is $160000. The corporate tax rate is 30%. The cost of debt is 9%, and the ratio of debt to equity is 1 for the levered firm. Use Modigliani and Miller's (1963) propositions in a world without bankruptcy, what is the value of the levered firm? Select one: a. $166300 b. $230000 c. $188235...
An unlevered company with a cost of equity of 11% generates $5 million in earnings before...
An unlevered company with a cost of equity of 11% generates $5 million in earnings before interest and taxes (EBIT) each year. The decides to alter its capital structure to include debt by adding $5 million in debt with a pre-tax cost of 6% to its capital structure and using the proceeds to reduce equity by a like amount as to keep total invested capital unchanged. The firm pays a tax rate of 28%. Assuming that the company's EBIT stream...
Aspen's Distributors has a levered cost of equity of 13.84 percent and an unlevered cost of...
Aspen's Distributors has a levered cost of equity of 13.84 percent and an unlevered cost of capital of 12.5 percent. The company has $5,000 in debt that is selling at par. The levered value of the firm is $14,600 and the tax rate is 25 percent. What is the pretax cost of debt? A) 7.92 percent B) 9.07 percent C) 8.16 percent D) 8.84 percent
6，A company has an EBIT of $4,865 in perpetuity. The unlevered cost of capital is 16.70%,...
6，A company has an EBIT of $4,865 in perpetuity. The unlevered cost of capital is 16.70%, and there are 27,970 common shares outstanding. The company is considering issuing $10,660 in new bonds at par to add financial leverage. The proceeds of the debt issue will be used to repurchase equity. The YTM of the new debt is 11.75% and the tax rate is 36%. What is the cost of the levered equity after the restructuring?
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT