Energy Efficiency Consulting (EEC) has three offices. The corporation has a debt

Question

Energy Efficiency Consulting (EEC) has three offices. The corporation has a debt-equity ratio 40 percent and makes interest payments $123,000 at the end of each year. The firm’s current equity cost of capital is 19 percent. Each of EEC’s offices estimates annual sales of $1.3 million, annual cost of goods sold of $670,000, and annual total general and administrative costs $405,000. The corporate tax rate is 40%.

If you assume these business conditions will remain the same forever and you have determined that the value of the company's equity $1,947,326, what is the total value of the enterprise?

A. $3,245,543

B. $4,868,315

C. None of these values is correct.

D. $3,115,722

Explanation / Answer

Value of the Enterprise is = Value of Equity + Value of Debt

Value of equity is given as $ 1,947,326 /-

Value of Debt is computed using the Debt/Equity ratio

Debt equity ratio is given as 40%, that is Debt/Equity = 0.40

Debt/1947326 = 0.4

Debt is = 0.4*1947326 = $ 778,930.40

Value of enterprise is = 1947326+778930 = $ 2,726,256 /-

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