Jet Corporation expects an EBIT of $26,500 every year forever. The company curre
ID: 2718118 • Letter: J
Question
Jet Corporation expects an EBIT of $26,500 every year forever. The company currently has no debt, and its cost of equity is 15 percent. The corporate tax rate is 35 percent.
What is the current value of the company?
Suppose the company can borrow at 10 percent. What will the value of the firm be if the company takes on debt equal to 40 percent of its unlevered value?
Suppose the company can borrow at 10 percent. What will the value of the firm be if the company takes on debt equal to 100 percent of its unlevered value?
What will the value of the firm be if the company takes on debt equal to 40 percent of its levered value?
What will the value of the firm be if the company takes on debt equal to 100 percent of its levered value?
Jet Corporation expects an EBIT of $26,500 every year forever. The company currently has no debt, and its cost of equity is 15 percent. The corporate tax rate is 35 percent.
What is the current value of the company?
Suppose the company can borrow at 10 percent. What will the value of the firm be if the company takes on debt equal to 40 percent of its unlevered value?
Suppose the company can borrow at 10 percent. What will the value of the firm be if the company takes on debt equal to 100 percent of its unlevered value?
What will the value of the firm be if the company takes on debt equal to 40 percent of its levered value?
What will the value of the firm be if the company takes on debt equal to 100 percent of its levered value?
Explanation / Answer
1. Value of the compnay current with EBIT of 26,500 forever is C*(1/r) where C = 26500 and r = 15% =0.15
Value of the firm = 26500/0.15 = $176,666.67
2. Total Debt = 40% of Unleverd firm = 0.4 * 176,666.67 = 70,666.67.
The inetrest expense is 10%. After tax expense is 0.10 (1-0.35) = 0.065 = 6.5%
Hence interest to be paid is 0.065*70,666.67 = 4593.33
hence The ebit will be 26500 -4593.33 = 21,906.67
hence Value of the Levered firm = value of the unleverd firm + Value pof tax shiled
Value of unleverd firm is 21,906.67/0.15 = 146,044.47
Value of tax shield = 70,666.67*0.35 = 24,733.33
Hence value of levered firm = 146,044.47 + 24,733.33 = 170,777.80
3.
Total Debt = 100% of Unleverd firm = 176,666.67 .
The inetrest expense is 10%. After tax expense is 0.10 (1-0.35) = 0.065 = 6.5%
Hence interest to be paid is 0.065*176,666.67 = 11,483.33
hence The ebit will be 26500 -11,483.33 = 15,016.67
hence Value of the Levered firm = value of the unleverd firm + Value pof tax shiled
Value of unleverd firm is 15,016.67/0.15 = 100,111.11
Value of tax shield = 176,666.67*0.35 = 61,833.33
Hence value of levered firm = 100,111.11 + 61,833.33 = 161,944.44
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