70.6k views
3 votes
The Montana Hills Co. has expected earnings before interest and taxes of $17,100 forever, an unlevered cost of capital of 12.4 percent, and debt with both a book and face value of $25,000. The debt has an annual 6.2 percent coupon. If the tax rate is 21 percent, what is the value of the firm?

1 Answer

3 votes

Answer:

$114,193.55

Step-by-step explanation:

The calculation of value of the firm is shown below:-

Value of the firm = (((EBIT × (1 - Tax)) ÷ Cost of capital) + (Debt × Tax)

=((($17,100 × (1 - 21%)) ÷ 12.4%) + ($25,000 × 21%)

= ((($17,100 × (0.79)) ÷ 12.4%) + ($25,000 × 21%)

= ($13,509 ÷ 12.4%) + ($25,000 × 21%)

= $108,943.55 + $5,250

= $114,193.55

So, for computing the value of the firm we simply applied the above formula.

User Tzinie
by
8.2k points
Welcome to QAmmunity.org, where you can ask questions and receive answers from other members of our community.