6.00 points Letang Corporation expects an EBIT of $19,500 every year forever. Th
ID: 2712959 • Letter: 6
Question
6.00 points Letang Corporation expects an EBIT of $19,500 every year forever. The company currently has no debt, and its cost of equity is 13.5 percent. The company can borrow at 8 percent and the corporate tax rate is 38. Requirement 1: What is the current value of the company? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) Value of the firm $ Requirement 2: (a) What will the value of the firm be if the company takes on debt equal to 40 percent of its unlevered value? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) Value of the firm $ (b) What will the value of the firm be if the company takes on debt equal to 100 percent of its unlevered value? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) Value of the firm $ Requirement 3: (a) What will the value of the firm be if the company takes on debt equal to 40 percent of its levered value? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) Value of the firm $ (b) What will the value of the firm be if the company takes on debt equal to 100 percent of its levered value? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) Value of theflrm $Explanation / Answer
Requirement 1:
Cuurent value of the company = EBIT * (1 - tax rate) / Cost of equity
= $19,500 * (1 - 38%) / 13.5%
= $89,555.56
Requirement 2:
a. Value of levered firm = Value of unlevred firm + PV of Tax shield
= $89,555.56 + 38% * 0.40 * $89,555.56
= $103,168.00
b. Value of levered firm = Value of unlevred firm + PV of Tax shield
= $89,555.56 + 38% * 1.00 * $89,555.56
= $123,586.67
Requirement 3:
a. Value of levered firm = Value of unlevred firm + PV of Tax shield
=> Value of levered firm = $89,555.56 + 38% * 0.4 * Value of levered firm
=> Value of levered firm = $105,607.97
b. Value of levered firm = Value of unlevred firm + PV of Tax shield
=> Value of levered firm = $89,555.56 + 38% * 1.00 * Value of levered firm
=> Value of levered firm = $144,444.45
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