Register
A firm has expected EBIT of $910, debt with a face and market value of $2,000 paying an 8.5% annual coupon, and an unlevered cost of capital of 12%. If the tax rate is 21%, what is the value of the equity
6.3k views
3 votes
A firm has expected EBIT of $910, debt with a face and market value of $2,000 paying an 8.5% annual coupon, and an unlevered cost of capital of 12%. If the tax rate is 21%, what is the value of the equity

User Vigs
by
3.9k points

1 Answer

1 vote

Answer: $4410

Step-by-step explanation:

Firstly, the value of the levered firm will be:

= EBT( 1- Tax) / Unlevered cost of capital + Debt Value ( Tax Rate)

= 910(1 - 21%) / 12% + 2000(21%)

= 910( 1 - 0.21)/0.12 + 2000(0.21)

= 5990 + 420

= 6410

Then, the value of equity will be:

= VAlue of Firm - Value of Debt

= $6410 - $2000

= $4410

User Glrs
by
4.0k points
Ask a Question
Welcome to QAmmunity.org, where you can ask questions and receive answers from other members of our community.

4.5m questions

5.9m answers

Other Questions

How can expansionary​ expenditure-based fiscal policy lead to crowding out in the​ economy? A. ​Expenditure-based fiscal policy increases the national​ debt, inducing​ forward-looking households and firms
Everyone has a unique spending plan. Which of the following factors has the greatest effect on a person's spending decisions?
Stevenson Company purchased equipment for $250,000 on January 1, 2010. The estimated salvage value is $50,000, and the estimated useful life is 5 years. The straight-line method is used for depreciation.
The Yum and Yee food truck near the business school serves customers during lunch hour by taking orders and making fresh batches of stir-fry. Customers have only one choice during the lunch hour so that
If Morgan worked 15 hours last week and is paid $10 per hour the amount of money she makes before taxes and other expenses are taken out is called: A. Net revenue B Net pay C Gross revenue D Gross pay
Link Copied!