Bruce & Co. expects its EBIT to be $91,000 every year forever. The company can b

Question

Bruce & Co. expects its EBIT to be $91,000 every year forever. The company can borrow at 4 percent. The company currently has no debt, and its cost of equity is 11 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.) Value of the company $ What will the value be if the company borrows $136,000 and uses the proceeds to repurchase shares? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Value of the comapny $

Explanation / Answer

Present value of perpetuity = cashflow/rate

Current value of company = 91000*(1-0.35)/0.11 = 537727.27

Value of the company = $537727.27

B.

Value of the company = 537727.27 - 0.35*136000 = $490127.27

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