Bruce & Co. expects its EBIT to be $87,000 every year forever. The firm can borr

Question

Bruce & Co. expects its EBIT to be $87,000 every year forever. The firm can borrow at 12 percent. Bruce currently has no debt, and its cost of equity is 16 percent.

If the tax rate is 35 percent, what is the value of the firm? (Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16))

What will the value be if Bruce borrows $160,000 and uses the proceeds to repurchase shares? (Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16))

Bruce & Co. expects its EBIT to be $87,000 every year forever. The firm can borrow at 12 percent. Bruce currently has no debt, and its cost of equity is 16 percent.

Explanation / Answer

Bruce & Co. expects its EBIT to be $87,000 every year forever. The firm can borrow at 12 percent. Bruce currently has no debt, and its cost of equity is 16 percent.

If the tax rate is 35 percent, what is the value of the firm? (Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16))

Value of Unlevered Firm

Value of the firm = EBIT*(1-tax rate)/Cost of Equity

Value of the firm = 87000*(1-35%)/16%

Value of the firm = $ 353,437.50

What will the value be if Bruce borrows $160,000 and uses the proceeds to repurchase shares? (Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16))

Value of levered Firm

Value of the firm = Value of Unlevered Firm + Tax rate * Debt

Value of the firm = 353437.50 + 35%*160000

Value of the firm = $ 409,437.50

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