Janetta Corp. has an EBIT rate of $1,050,000 per year that is expected to contin

Question

Janetta Corp. has an EBIT rate of $1,050,000 per year that is expected to continue in perpetuity. The unlevered cost of equity for the company is 13 percent, and the corporate tax rate is 35 percent. The company also has a perpetual bond issue outstanding with a market value of $2.07 million.

What is the value of the company? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567. Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16))

Value of the company    $_____________

Explanation / Answer

This can be solved with Modgliani and miller approach(which says that value of firm doesn't change with structure of finance)

Formula : EBIT(1-tax rate)     + Debt(tax rate)

cost of equity unlevered

Applying that formula ; 1050000(1-.35) / .13 + 2070000(.35)

= 682500/.13+724500 = 5250000+724500

=5974500 $

Total vaue of the firm = 5974500 $

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