Question

Hunter Corporation expects an EBIT of $61,000 every year forever. The company currently has no debt and its cost of equity is 12 percent. The corporate tax rate is 25 percent.

a. What is the current value of the company? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

b-1. Suppose the company can borrow at 6 percent. What will the value of the company be if takes on debt equal to 50 percent of its unlevered value? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

b-2. Suppose the company can borrow at 6 percent. What will the value of the company be if takes on debt equal to 100 percent of its unlevered value? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

c-1. What will the value of the company be if takes on debt equal to 50 percent of its levered value? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

c-2. What will the value of the company be if takes on debt equal to 100 percent of its levered value? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

A)Current value of company = V = EBIT*(1-Tax Rate)/Cost of equity

=  $61,000*(1-25%)/12%

= $381,250

B1)the value of the company be if takes on debt equal to 50 percent of its unlevered value

Value of company = Value of unelected firm + (Value od unleverd firm*50%) * tax rate

= $381,250 + ($381,250/2) * 25%

= $428,906.25

B2)value of the company be if takes on debt equal to 100 percent of its unlevered value

= $381,250 + ($381,250) * 25%

= $476,562.5

C1) value of the firm be if the company takes on debt equal to 50 percent of its levered value

VL = Value of unlevered + Tax *  [(0.50)*VL ]

VL = $381,200 + 0.25*0.5 VL

VL - 0.125VL = $381,250

VL = $381,250/0.875

= $435,714.30

C2)value of the company be if takes on debt equal to 100 percent of its levered value

VL = Value of unlevered + Tax *  [(100%)*VL ]

VL = $381,200 + 0.25VL

VL - 0.25VL = $381,250

VL = $381,250/0.75

= $508,333.33