Letang Corporation expects an EBIT of $23,250 every year forever. The company cu

Question

Letang Corporation expects an EBIT of $23,250 every year forever. The company currently has no debt, and its cost of equity is 15 percent. The company can borrow at 8.5 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 the firm $

Explanation / Answer

Ans) LETANG CORPORATION EBIT $    23,250.00 Cost of equity 15% Borrowed cost 8.50% Value of Unleavered firm Tax Rate 38% 1 V = EBIT(1 – tC)/RU V=23250(1-.38)/.15 $    96,100.00 2 The value of the firm if the company take debt 40% of unleavered value V = VU + tCD V=96100+.38(96100*40%) $ 110,707.20 The value of the firm if the company take debt 100% of unleavered value V = VU + tCD V=96100+.38(96100) $ 132,618.00 3 VL = VU + tCD

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