P16-16 M&M [LO2] Tool Manufacturing has an expected EBIT of $38,000 in perpetuit
ID: 2645223 • Letter: P
Question
P16-16 M&M [LO2]
Tool Manufacturing has an expected EBIT of $38,000 in perpetuity, and a tax rate of 31 percent. The firm has $73,000 in outstanding debt at an interest rate of 9 percent, and its unlevered cost of capital is 15 percent. The value of the firm is $ according to M&M Proposition I with taxes. (Do not include the dollar sign ($). Round your answer to 2 decimal places. (e.g., 32.16))
Tool Manufacturing has an expected EBIT of $38,000 in perpetuity, and a tax rate of 31 percent. The firm has $73,000 in outstanding debt at an interest rate of 9 percent, and its unlevered cost of capital is 15 percent. The value of the firm is $ according to M&M Proposition I with taxes. (Do not include the dollar sign ($). Round your answer to 2 decimal places. (e.g., 32.16))
Explanation / Answer
EBIT 38000
Taxes = 6750, ( 73,000 * 9%)
EBT = 31,430
Taxes = 9743.30
Net cash flow = 21,686.7
Value = Cash flow/cost of capital - value of debt
= 21,686.7/.15 = 144,578 - 73,000
= 71,578.00
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