Question

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?

Answer 1

$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.