Letang Corporation expects an EBIT of $20,500 every year forever. The company cu
ID: 2742514 • Letter: L
Question
Letang Corporation expects an EBIT of $20,500 every year forever. The company currently has no debt, and its cost of equity is 15.5 percent. The company can borrow at 9.5 percent and the corporate tax rate is 40.
What is the current value of the company? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)
(a) 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).)
(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).)
(a) 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).)
(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).)
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).)
Explanation / Answer
You have to say that as only, Equity is used for finance and then say that 15.5% can bring EAT of 12300, can bring then what will be 100% which is 79354.84.
Do a carefull analysis of the table as given, you will find the value's in unleverd just add the values of tax shield to the figures arrived at levered portion.
EBIT $ 20,500.00 Less:taxes $ 8,200.00 Earnings after Taxes $ 12,300.00 Take the valuation of the firm as x, Now, Rate When 0% Debt is used take Debt-after tax*value of debt/Value of the firm 5.70% 0 Similarly, Equity is 15.50% 15.50% Total 21.20% 15.50% Value of the firm 79354.84Related Questions
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