Question

The Winter Wear Company has expected earnings before interest and taxes of $3,800, an unlevered cost of capital of 15.4 percent and a tax rate of 22 percent. The company also has $2,600 of debt with a coupon rate of 5.7 percent. The debt is selling at par value. What is the value of this firm

Answer 1

$ 19,819

Step-by-step explanation:

Calculation to determine the value of this firm

Using this formula

Firm Value = [ [ Earnings before interest and tax x (1 - tax rate) ] / Unlevered cost of capital ] + Amount of debt x tax rate

Let plug in the formula

Firm value= [ [ $ 3,800 x (1 - 0.22) ] / 0.154 ] + $ 2,600 x 22%

Firm value=[($3,800×.78)/0.154]+$572

Firm value=($2,964/0.154)+$572

Firm value=$19,246.75+$572

Firm value=$19,818.76

Firm value= $ 19,819 Approximately

Therefore the value of this firm will be $ 19,819