Question

Meyer & Co. expects its EBIT to be $106,000 every year forever. The firm can borrow at 7 percent. The company currently has no debt, and its cost of equity is 14 percent.

a. If the tax rate is 25 percent, what is the value of the firm? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
b. What will the value be if the company borrows $210,000 and uses the proceeds to repurchase shares? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

a. Value of the firm __.
b. Value of the firm___.

Answer 1

Consider the following calculations

Step-by-step explanation:

a. Value of Firm=(EBIT*(1-Tax))/ke

=(106000*(1-25%))/.14

=567857.14

b. Value of Firm=U unlevered + Debt*(1-tax)

V L = $567857.14+210000*.25

=620357.14