Question

Martinique Fashion is an all-equity firm that has projected perpetual EBIT of $344,000. The current cost of equity is 12.4 percent and the tax rate is 34 percent. The company is in the process of issuing $989,000 worth of perpetual bonds with an annual coupon rate of 6.6 percent at par. What is the value of the levered firm

Answer 1

$2,167,228

Step-by-step explanation:

Calculation to determine the value of the levered firm

First step is calculate Unlevered firm value using this formula

Unlevered firm value = EBIT(1 - Tax) / Cost of equity

Let plug in the formula

Unlevered firm value = $344,000(1 - 0.34) / 0.124

Unlevered firm value = $344,000(0.66)/0.124

Unlevered firm value = $1,830,968

Now let calculate the Levered firm value using this formula

Levered firm value = Unlevered firm value + (Debt * Tax rate)

Let plug in the formula

Levered firm value = $1,830,968 + ($989,000 * 0.34)

Levered firm value = $1,830,968+$336,260

Levered firm value = $2,167,228

Therefore the value of the levered firm is $2,167,228