Question

6) A company is currently financed with 50% equity and 50% debt. The company generates earnings...

6) A company is currently financed with 50% equity and 50% debt. The company generates earnings after taxes of $10 million per year. It is expected that these earnings after taxes will remain $10 million forever. The company’s cost of equity is 14%, its cost of debt is 7%, and it has a tax rate of 30%. What is the value of the levered company?

A) $10 million

B) $73 million

C) $105.8 million

D) $173.5 million

E) $100 million

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

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
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...
An unlevered company with a cost of equity of 14% generates $3 million in earnings before...
An unlevered company with a cost of equity of 14% generates $3 million in earnings before interest and taxes (EBIT) each year. The decides to alter its capital structure to include debt by adding $4 million in debt with a pre-tax cost of 7% 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 39%. Assuming that the company's EBIT stream...
ABC Company has €1.2 million in assets that are currently financed with 100% equity. The company's...
ABC Company has €1.2 million in assets that are currently financed with 100% equity. The company's earnings before interest and tax is €300,000, and its tax rate is 30%. If ABC changes its capital structure (recapitalizes) to include 40% debt, what is ABC's return on equity (ROE) before and after the change? Assume that the interest rate on debt is 5%.    (Note: ROE = net income / shareholders’ equity
De Leon Imports is currently 100% equity financed, but would like to have a debt to...
De Leon Imports is currently 100% equity financed, but would like to have a debt to equity ratio of 0.8. If their cost of equity is currently 10.2%, what will it be after the move? Their cost of debt is 4.1% and their tax rate is 31%.
A company is financed with a combination of 55% equity and 45% debt. The company has...
A company is financed with a combination of 55% equity and 45% debt. The company has a beta of 1.75. The risk free rate is 4% and the market rate of return is 16%. The debt is currently being traded in the market is 8.5%. The company tax free rate is 35%. With all these data, answer the following questions: 1. What is the company’s afteer tax cost of debt 2.what is the company’s cost of equity 3. What is...
Newcastle Inc. currently has no debt, annual earnings before interest and taxes of $76 million and...
Newcastle Inc. currently has no debt, annual earnings before interest and taxes of $76 million and an average tax rate of 34%. Net income is expected to stay constant forever. The firm pays out 100% of net income as dividends. Using the CAPM, the firm estimates that its cost of equity is 13%. The risk-free rate is 2% and the expected equity market risk premium is 7%. There are 8 million shares outstanding. The firm is considering issuing bonds worth...
Company U has no debt outstanding currently and the cost of equity is 12%. Its EBIT...
Company U has no debt outstanding currently and the cost of equity is 12%. Its EBIT is expected to be $ 201896 every year forever. The tax rate is 35%. Calculate the value of the firm. Company U has no debt outstanding currently and the cost of equity is 12%. Its EBIT is expected to be $ 201896 every year forever. The tax rate is 35%.Calculate the value of the firm if it borrows $ 453493 and uses the proceeds...
De Leon Imports is currently 100% equity financed, but would like to have a debt to...
De Leon Imports is currently 100% equity financed, but would like to have a debt to equity ratio of 0.9. If their cost of equity is currently 12.7%, what will it be after the move? Their cost of debt is 6.3% and their tax rate is 21%. Please give your answer in the form of a decimal, to the nearest 0.001. For example, if the cost of equity is 8.67%, your answer should be 0.087.
Healthy Food Inc (HFI) is currently all-equity financed with a total value of $90 million and...
Healthy Food Inc (HFI) is currently all-equity financed with a total value of $90 million and a cost of capital of 18%. If HFI’s capital structure is changed to include $30 million of debt at 6%, and we assume a world without taxes where the risk-free rate is 4% and the expected market return is 14%. Determine the below values, then explain whether a risk averse investor would prefer to invest in the unlevered HFI or the levered HFI. a....
Healthy Food Inc (HFI) is currently all-equity financed with a total value of $90 million and...
Healthy Food Inc (HFI) is currently all-equity financed with a total value of $90 million and a cost of capital of 18%. If HFI’s capital structure is changed to include $30 million of debt at 6%, and we assume a world without taxes where the risk-free rate is 4% and the expected market return is 14%. Determine the below values, then explain whether a risk averse investor would prefer to invest in the unlevered HFI or the levered HFI. a....
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT