Question

Cornerstone corporation expects an ebit of $22,500 every year forever. the company currently has no debt, and its cost of equity is 13.9 percent. the company can borrow at 8.7 percent and the corporate tax rate is 21 percent.

What is the current value of the company?

a. $97,338.13
b. $102,156.25
c. $105,935.78
d. $110,000.00

Answer 1

The current value of Cornerstone Corporation is calculated as the perpetuity of after-tax EBIT divided by the cost of equity, resulting in $127,877.70.

Step-by-step explanation:

The current value of Cornerstone Corporation can be calculated using the formula for the value of a perpetuity, which is EBIT (1 - Tax Rate) / Cost of Equity. Given an EBIT of $22,500, a tax rate of 21%, and a cost of equity of 13.9%, the calculation would be:

• 
  
• $22,500 × (1 - 0.21) / 0.139
• 
  
• $22,500 × 0.79 / 0.139
• 
  
• $17,775 / 0.139
• 
  
• $127,877.70

Therefore, the current value of Cornerstone Corporation is $127,877.70.