Question

Bassett fruit farm expects its ebit to be $365,000 a year forever. currently, the firm has no debt. the cost of equity is 12.7 percent and the tax rate is 21 percent. the company is in the process of issuing $3 million worth of bonds at par that carry an annual coupon of 6.6 percent. what is the unlevered value of the firm?

a. $1,707,165
b. $2,916,850
c. $2,512,231
d. $2,270,472
e. $2,107,612

Answer 1

The unlevered value of the firm is approximately $2,270,472. Therefore correct option is D

Step-by-step explanation:

The unlevered value of the firm can be calculated using the formula for the perpetuity value. The formula for the unlevered value is:

Unlevered value = EBIT * (1 - tax rate) / cost of equity

Plugging in the given values:

EBIT = $365,000

Tax rate = 21%

Cost of equity = 12.7%

Using these values, we can calculate the unlevered value:

Unlevered value = $365,000 * (1 - 0.21) / 0.127

Unlevered value = $365,000 * 0.79 / 0.127

Unlevered value = $2,270,472.4

Therefore, the unlevered value of the firm is approximately $2,270,472.