Question

Wayfarer Company has no debt, and a value of $70.000 million. Adventures Incorporated is otherwise identical but has $28.000 million of debt in its capital structure. Under the different models, what is the value of Adventures Incorporated if its corporate tax rate is 25%, the personal tax rate on equity is 10%, and the personal tax rate on debt is 26%?

Answer 1

Following are the solution to this question:

Step-by-step explanation:

Please find the complete question in the attachment.

In point 1:

The answer is =70.000

In point 2:

`=70.000+28.000 * 25\%\\\\=70.000+28.000 * (25)/(100)\\\\=70.000+28.000 * (1)/(4)\\\\=70.000+ 7 \\\\=77.000\\\\=77`

In point 3:

`=70.000+(1-(1-25 \%) * ((1-10\%))/((1-26\%)) * 28.000)\\\\=70.000+(1-(1- (25)/(100)) * ((1- (10)/(100)))/((1-(26)/(100))) * 28.000)\\\\=70.000+(1-1+ (1)/(4)) * ((( 10-1)/(10)))/(( (100-26)/(100))) * 28.000)\\\\=70.000+((1)/(4)) * (((9)/(10)))/(((74)/(100))) * 28.000)\\\\=70.000+((1)/(4)) * (0.9)/(20.72)\\\\=70.000+ (0.9)/(82.88)\\\\=70.000+0.01058\\\\=70.01058\\\\`