Letang Corporation expects an EBIT of S21.250 every year forever. The company cu
ID: 2734142 • Letter: L
Question
Letang Corporation expects an EBIT of S21.250 every year forever. The company currently has no debt, and its cost of equity is 14 percent. The company can borrow at 8 percent and the corporate tax rate is 40. 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).) Requirement 2: What will the value of the firm be if the company takes on debt equal to 50 percent of its unlevered value? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g.,32.16).) 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).) Requirement 3: What will the value of the firm be if the company takes on debt equal to 50 percent of its levered value? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) 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).)Explanation / Answer
Solution:
3) a) Calculation of the value of the firm be if the company takes on debt equal to 50 percent of its levered value:
VL = VU + tCD
With debt being 50 percent of the value of the levered firm, D must equal (.50) VL, so:
VL = VU + T [(.50)VL]
VL = 91,071.43 + 0.40 [(.50)VL]
= 91,071.43 + 0.20 VL
VL = 91,071.43 / 0.80
= 113,839.29
3) b) Calculation of the value of the firm be if the company takes on debt equal to 100 percent of its levered value:
With debt being 100 percent of the value of the levered firm, D must equal (1.0) VL, so:
VL = VU + T [(1.0)VL]
VL = 91,071.43 + 0.40 [(1.0)VL]
= 91,071.43 + 0.40 VL
VL = 91,071.43 / 0.60
= 151,785.71
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