Question

Tool Manufacturing has an expected EBIT of $95,000 in perpetuity and a tax rate of 21 percent. The firm has $265,000 in outstanding debt at an interest rate of 5.8 percent, and its unlevered cost of capital is 11.7 percent. What is the value of the firm according to M&M Proposition I with taxes? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

$697,102.99

Step-by-step explanation:

VU = EBIT(1 - tC)/RU

EBIT =$95,000

tC=21%

RU=11.7%

Hence

VU = ($95,000)(1 - .21)/.117

VU=($95,000)(0.79)/.117

VU=$75,050/0.117

VU = $641,452.99

The value of the levered firm:

VL = VU + tCD

VU=$641,452.99

tCD=0.21($265,000)

VL = $641,452.99+ .21($265,000)

VL=$641,452.99+$55,650

VL=$697,102.99

Therefore the value of the firm according to M&M Proposition I with taxes is $697,102.99