4. value: 10.00 points Jet Corporation expects an EBIT of $27,000 every year for
ID: 2794958 • Letter: 4
Question
4. value: 10.00 points Jet Corporation expects an EBIT of $27,000 every year forever. The company currently has no debt, and its cost of equity is 14 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.) E 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 ue of the firm b-2 Suppose the company can borrow at 9 percent. What will the value of the firm be if the takes on debt equal to 100 percent of its unlevered value? (Do not round intermediate cafculations. 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, o.g.. 32.16.) ue of the firm c-2 What will the value of the fim 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.)Explanation / Answer
a) Current Value of company = EBIT(1-t)/ ke= (27,000*0.65)/0.14 = $ 125,357.14 which is the unlevered value of the firm
b-1) If company takes debt,
Unlevered value of firm = 125,357.14
Value of debt = 40% * 12,357.14
Thus, Value of firm = 1.4 * 125,357.14 = $ 175,500
b- 2)
A leveraged firm can be shown withh 40% debt as
VL = Vu + T *(0.4 * Vu)
VL = 175,500+ 0.35*0.4*175,500= $ 200,070
b- 2) If debt is 100% of Vu, then
VL = 175,500+0.35*175,500= $ 236,925
c -1)
According to MM proposition,
VL= Vu + T* Debt
With debt equal to 40% of levered value,
VL = 175,500+ 0.35* 0.4* VL
VL(1-0.14) = 175,500
VL = $ 204,069.76
c-2)
With debt equal to 100% of VL
VL(1-0.35) = 175,500
VL = $ 270,000
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