Final answer:
The value of Kline construction's levered firm can be calculated by adding the tax shield on the proposed debt to the value of the unlevered firm. Using the given perpetual EBIT, cost of equity, tax rate, and debt details, the levered value totals to $2,835,041. However, this does not align with any of the multiple-choice answers provided, suggesting a discrepancy. O $1,886,007
Step-by-step explanation:
To determine the value of the levered firm, we first need to understand the concept of levered value which accounts for the firm's debts. The value of a levered firm can be found using the Modigliani-Miller proposition with corporate taxes, which states that the value of a levered firm is equal to the value of an unlevered firm plus the tax shield on debt. In this case, Kline construction has an all-equity (unlevered) firm with a projected perpetual EBIT of $292,000. The cost of equity is 11.6%, and the tax rate is 35%. The company is also planning to issue $908,000 worth of perpetual bonds at a 5.8% coupon rate.
First, calculate the unlevered firm value (VU) by discounting the perpetual EBIT by the cost of equity:
VU = EBIT / Cost of Equity = $292,000 / 0.116 = $2,517,241.
Next, we will calculate the tax shield on the debt (TS) using the tax rate and the value of the debt:
TS = Tax Rate × Debt = 0.35 × $908,000 = $317,800.
To find the value of the levered firm (VL), we add the tax shield to the unlevered value:
VL = VU + TS = $2,517,241 + $317,800 = $2,835,041.
However, the question seems to be providing multiple-choice answers that do not match the calculated levered value. This discrepancy may indicate that there are typos in the provided options, issues with the data in the question, or we might need additional information to match the levered value with one of the provided choices.