In: Finance
An unlevered firm has a cost of capital of 13.6 percent and earnings before interest and taxes of $138,000. A levered firm with the same operations and assets has both a book value and a face value of debt of $520,000 with an annual coupon of 7 percent. The applicable tax rate is 21 percent. What is the value of the levered firm?
Value of unlevered firm=
((EBIT(1-tax rate)/cost of capital
=(138000(1-0.21))/0.136)
=(109020/0.136)
=801617.65
=801618
Hence value of levered firm= value of unlevered firm+(tax rate*value of debt)
=801618+(0.21*520000)
=801618+109200
=910818.