An unlevered firm has a cost of capital of 13.6 percent and earnings before interest and...

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?

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Expert Solution

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.

jeff jeffy answered 2 years ago

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