Jet Corporation expects an EBIT of $16,500 every year forever. The company curre

Question

Jet Corporation expects an EBIT of $16,500 every year forever. The company currently has no debt, and its cost of equity is 13 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., 32.16.) Current value b-1 Suppose the company can borrow at 9 percent. What will the value of the firm be if the company takes on debt equal to 40 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 b-2 Suppose the company can borrow at 9 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 40 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

a) Value of firm = EBIT x (1 - tax) / Cost of capital

= 16,500 x (1 - 35%) / 13% = 82,500

b1) Debt = 40% x 82,500 = 33,000

Value of levered firm = Value of unlevered firm + Debt x Tax rate

= 82,500 + 33,000 x 35%

= 94,050

b2) Debt = 100% x 82,500 = 82,500

Value of firm = 82,500 x (1 + 35%) = 111,375

c1) Value of levered firm (Vl) = Value of unlevered firm (Vu) + Debt x Tax rate

If Debt = 40% x Vl

=> Vl = 82,500 + 40% x Vl x 35%

=> Vl x (1 - 40% x 35%) = 82,500

=> Vl = 95,930.23

c2) Vl = 82,500 / (1 - 35%) = 126,923.08

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