Question

Change Corporation expects an EBIT of $49,000 every year forever. The company current has no debt, and its cost of equity is 13 percent. The corporate tax rate is 24 percent. What is the current value of the company? Suppose the company can borrow at 10 percent. What will the value of the firm be if the company takes on debt equal to 60 percent of its unlevered value? Suppose the company can borrow at 10 percent. What will the value of the firm be if the company takes on debt equal to 100 percent of its unlevered value? What will the value of the firm be if the company takes on debt equal to 60 percent of its levered value? What will the value of the firm be if the company takes on debt equal to 100 percent of its levered value?

Answer 1

A) Current Value of company = EBIT(1-tax) / Ke  

= 49000 (1-.24) /13%

= $286461.54

B) Value of firm, If company takes on debt equal to 60% of its unlevered value

=286461.54+(0.24*286461.54*0.6)

= $327712.00

C) Value of firm,  If company takes on debt equal to 100% of its unlevered value

= 286461.54 +(0.24* 286461.54*1)

=$355212.31

d) Value of the firm be if the company takes on debt equal to 60 percent of its levered value

=286461.54/(1-(0.24*0.6))

=$334651.33

e) value of the firm be if the company takes on debt equal to 100 percent of its levered value

=286461.54/(1-(0.24*1))

=$376923.08

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