Question

Calculate the market value of Lotle Group, a firm with total assets of $80 million and $30 million of perpetual debt in its capital structure. The firm’s cost of equity is 14% and the cost of debt is 9%. Lotle expects annual, perpetual net operating income (EBIT) of $9 million and a marginal tax rate of 40%.

Answer 1

The market value of Lotle Group is $ 83.53.

Step-by-step explanation:

The market value of Lotle Group can be calculated by dividing the perpetual net operating income (EBIT) with company WAAC. Detail calculation is given below.

MW = EBIT/WAAC = $ 9/10.775% = $ 83.53

WAAC Calculation

WAAC = 14%*(50/80)% + 9%(0.60)(30/80)

WAAC = 8.75% + 2.025% = 10.775%