Question

Cede & Co. expects its EBIT to be $115,000 every year forever. The company can borrow at 7 percent. The company currently has no debt and its cost of equity is 13 percent. a. If the tax rate is 24 percent, what is the value of the company? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What will the value be if the company borrows $255,000 and uses the proceeds to repurchase shares? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Answer: See explanation

Step-by-step explanation:

a. . If the tax rate is 24 percent, what is the value of the company?

= [($115,000 × (1-24%)]/13%

= ($115,000 × 76%)/13%

= ($115000 × 0.76)/0.13

= $87400/0.13

= $672307.69

b. What will the value be if the company borrows $255,000 and uses the proceeds to repurchase shares?

= $672307.69 + ($255000×24%)

= $672307.69 + ($255000 × 0.24)

= $672307.69 + $61200

= $733507.69