Question

Tatum can borrow at 7.15 percent. The company currently has no debt and the cost of equity is 11.55 percent. The current value of the firm is $670,000. The corporate tax rate is 25 percent. What will the value be if the company borrows $385,000 and uses the proceeds to repurchase shares? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) Value of the firm __________

Answer 1

$766,250

Step-by-step explanation:

The value of the firm is calculated as follows:

Value of firm = Current value + (Borrowing *Tax rate)

Value of firm = $670,000 + ($385,000*25%)

Value of firm = $670,000 + $96,250

Value of firm = $766,250

The value of the firm will be $766,250 if it borrows $385,000 and uses the proceeds to repurchase shares.