Question

An unlevered firm has a cost of capital of 16.7 percent and earnings before interest and taxes of $489,602. A levered firm with the same operations and assets has face value of debt of $650,000 with a coupon rate of 7.5 percent that sells at par. The applicable tax rate is 35 percent. What is the value of the levered firm

Answer 1

$2,133,136.53

Step-by-step explanation:

Calculation for value of the levered firm

First step is to calculate the VU

VU= [$489,602 × (1 - .35)] / .167

VU= $1,905,636.53

Now let calculate the value of the levered firm

VL= $1,905,636.53 + .35($650,000)

VL= $2,133,136.53

Therefore the value of the levered firm is $2,133,136.53