Bruce & Co. expects its EBIT to be $80,000 every year forever. The company can b

Question

Bruce & Co. expects its EBIT to be $80,000 every year forever. The company can borrow at 4 percent. The company currently has no debt, and its cost of equity is 10 percent.

If the tax rate is 35 percent, what is the value of the company? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

What will the value be if the company borrows $122,000 and uses the proceeds to repurchase shares? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

If the tax rate is 35 percent, what is the value of the company? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Explanation / Answer

Current value of company:

= $80,000/10%

= $800,000

If it had debt of $122,000:

Net income = ($80,000-$122,000×4%) = $75,120

Value of company:

= Value of debt+Value of equity

= $122,000*(1-35%)+$75,120/10%

= $830,500

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