Question

Change Corporation expects an EBIT of $61,000 every year forever. The company currently has no debt, and its cost of equity is 12 percent. The corporate tax rate is 25 percent. a. What is the current value of the company?

Answer 1

The correct answer is $381,250.

Step-by-step explanation:

According to the scenario. the given data are as follows:

EBIT = $61,000

Cost of equity = 12%

Tax rate = 25%

So, we can calculate the current value of company by using following formula:

Current value = EBIT × ( 1 - Tax rate ) / Cost of Equity

by putting the following value:

= $61,000 × (1 - 0.25) / 0.12

= $381,250

Hence the current value of the company is $381,250.