Question

Bassett Fruit Farm expects its EBIT to be $377,000 a year forever. Currently, the firm has no debt. The cost of equity is 13.3 percent and the tax rate is 39 percent. The company is in the process of issuing $2.7 million worth of bonds at par that carry an annual coupon of 6.5 percent. What is the unlevered value of the firm

Answer 1

$1,729,098

Step-by-step explanation:

Given that,

EBIT = $377,000

No debt.

Cost of equity = 13.3 percent

Tax rate = 39 percent

Value of issuing bonds at par = $2.7 million

Coupon rate = 6.5%

Therefore,

Unlevered value of the firm:

= [EBIT × (1 - Tax rate)] ÷ Cost of equity

= [$377,000 × (1 - 0.39)] ÷ 0.133

= $229,970 ÷ 0.133

= $1,729,098