Question

What will the value be if the company borrows $132,000 and uses the proceeds to repurchase shares? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

$484,950

Step-by-step explanation:

The computation of the value of the firm after proceeding with the shares repurchase is shown below:

= EBIT × (1 - tax rate) ÷ cost of equity + borrowed amount × tax rate

= $81,000 × (1 - 0.35) ÷ 0.12 + $132,000 × 35%

= $438,750 + $46,200

= $484,950

Hence, the value is $484,950

We simply applied the above formula

And the same is to be considered