Letang Corporation expects an EBIT of $20,250 every year forever. The company cu

Question

Letang Corporation expects an EBIT of $20,250 every year forever. The company currently has no debt, and its cost of equity is 15 percent. The company can borrow at 9.5 percent and the corporate tax rate is 38.

1. What will the value of the firm be if the company takes on 40 percent of its unlevered value?

2.What will the value of the firm be if the company takes on debt equal to 100 percent of its unlevered value?

3.What will the value of the firm be if the company takes on debt equal to 40 percent of its levered value?

4.What will the value of the firm be if the company takes on debt equal to 100 percent of its levered value?

Letang Corporation expects an EBIT of $20,250 every year forever. The company currently has no debt, and its cost of equity is 15 percent. The company can borrow at 9.5 percent and the corporate tax rate is 38.

1. What will the value of the firm be if the company takes on 40 percent of its unlevered value?

2.What will the value of the firm be if the company takes on debt equal to 100 percent of its unlevered value?

3.What will the value of the firm be if the company takes on debt equal to 40 percent of its levered value?

4.What will the value of the firm be if the company takes on debt equal to 100 percent of its levered value?

Explanation / Answer

Cost of debt 9.5%(1-tax rate) 5.89% Cost of equity 15% Cost of capital Equity/Total* cost of equity + debt/Total *cost of debt Cost of capital cost of equity 15% Value of the firm for no debt 100% unlevered EBIT/Cost of capital Value of the firm for no debt 100% unlevered 135000.00 Value of the firm if 40% unlevered value (0.4*0.15)+(0.6*0.0589) 9.53% Value of the firm if 40% unlevered value 212486.88 Value of the firm if 100% unlevered value 135000.00 Value of the firm if 40% levered value (0.6*0.15)+(0.4*0.0589) 11.36% Value of the firm if 40% levered value 178257.04 Value of the firm if 100% levered value 5.89% Value of the firm if 100% levered value 343803.06

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