Question

Simmons Mineral Operations, Inc. is a company that has no debt and that has a forecasted EBIT of $324,000 perpetually. Right now the cost of equity of Simmons Mineral Operations, Inc. is 12.4 percent and the corporate tax rate is 34 percent. The firm is in the process of selling $940,000 worth of perpetual bonds with an annual interest rate of 6.6 percent at par. What is the value of Simmons Mineral Operations, Inc. after it issues debt?

Answer 1

the value of the amount is $2,062,116

Step-by-step explanation:

The computation of the value of the amount after issuance of the debt is shown below:

= [[ EBIT × (1 - tax rate) ] ÷ cost of equity] + value of bonds × tax rate

= [$324,000 x 0.66 ] ÷ 0.124 ] + $940,000 x 34%

= $1,742,516 + $319,600

= $2,062,116

hence, the value of the amount is $2,062,116

We simply applied the above formula