Jet Corporation expects an EBIT of $29,550 every year forever. The company curre

Question

Jet Corporation expects an EBIT of $29,550 every year forever. The company currently has no debt, and its cost of equity is 11 percent. The corporate tax rate is 35 percent. a. What is the current value of the company? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.1 Current value b-1 Suppose the company can borrow at 7 percent. 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.) Value of the firnm b-2 Suppose the company can borrow at 7 percent. 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.) Value of the firm c-1 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.) Value of the firm c-2 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.) Value of the firmm

Explanation / Answer

EBIT $           29,550 Cost of Equity,Ke 11% Tax rate,Tc 35% a) V = EBIT*(1-Tc)/Ke $ 1,74,613.64 b) Vl = Vu + TcD D = 0.5 Vu $     87,306.82 Vl = $ 2,05,171.02 c) Vl = Vu + TcD D = Vu $ 1,74,613.64 Vl = $ 2,35,728.41 d) Vl = Vu + TcD D =0.5Vl Vl = Vu + 0.35*0.5*Vl Vl (1 - 0.175) = Vu Vl = $ 2,11,652.89 e) Vl = Vu + TcD D =Vl Vl = Vu + 0.35*Vl Vl (1 - 0.35) = Vu Vl = $ 2,68,636.36

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