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Tool Manufacturing has an expected EBIT of RM63,000 in perpetuity and a tax rate of 21...

  1. Tool Manufacturing has an expected EBIT of RM63,000 in perpetuity and a tax rate of 21 percent. The firm has RM115,000 in outstanding debt at an interest rate of 7 percent and its unlevered cost of capital is 12 percent. What is the value of the company according to MM Proposition I with taxes?
  2. pls do not write in 2 3 line explain formulas and do it pls

Solutions

Expert Solution

Unlevered firm is firm having no debt in its capital structure

Levered firm is firm having debt in its capital structure

Value of unlevered company=EBIT*(1-tax rate)/cost of unlevered capital=63000*(1-21%)/12%=414750.000

According to MM 1 Proposition:
value of levered firm=Value of unlevered firm+Debt*tax rate=414750.000+115000*21%=438900.000

The company is levered because it has debt in its capital structure hence value of the company=438900.000

jeff jeffy answered 2 years ago
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