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

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?
pls do not write in 2 3 line explain formulas and do it pls

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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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