Question

Now imagine that Tiger Pros is 60% financed with equity and 40% financed with debt. Cost of equity is 16.5% and after-tax cost of debt is 11%. It has the same perpetual EBIT of $500 a year but has a $120 perpetual interest expense. The firm is subject to a 21% tax rate. What is the market value of Tiger Pros

Answer 1

$2,762.24

Step-by-step explanation:

The computation of the market value as follows:

But before that WACC is

WACC is

= Weight of Equity × Cost of Equity + Weight of Debt × Cost of Debt × (1 -Tax Rate)

= 60% × 16.5% + 40% × 11%

= 14.30%

Now the Market Value is

= (EBIT) × (1 - Tax rate) ÷ WACC

= $500 × (1 - 21%) ÷ 14.30%

= $2,762.24