Question

Full Moon Corporation expects an EBIT of $25,250 every year forever. The company currently has no debt, and its cost of equity is 12 percent. The corporate tax rate is 35 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.)

Current value           $  

b-1 Suppose the company can borrow at 7 percent. What will the value of the firm be if the company takes on debt equal to 40 percent of its unlevered value? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Value of the firm           $  

b-2 Suppose the company can borrow at 7 percent. What will the value of the firm be if the company 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.)

Value of the firm           $  

c-1 What will the value of the firm be if the company takes on debt equal to 40 percent of its levered value? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Value of the firm           $  

c-2 What will the value of the firm be if the company 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.)

Value of the firm           $

Answer 1

please find below the answer. ..

Answer a)

Value of firm = EBIT *(1-tax rate)/Cost of equity

=25250*(1-35%)/.12

136770.83

Answer b-1)

Value of the firm be if the company takes on debt equal to 40 percent of its unlevered value

Value of firm = Value of unlevered firm + Tax * Debt

value of firm =

=136770.83+0.35*136770.83/2

160705.73

Answer b-2)

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

Value of firm = Value of unlevered firm + Tax * Debt

value of firm =

=136770.83+0.35*136770.83

184640.62

Answer c-1)

What will the value of the firm be if the company takes on debt equal to 40 percent of its levered value?

Value of Levered firm = Value of unlevered firm + Value of levered firm *.35*.4

VL=136770.82+VL*0.140

VL=

=136770.82/(1-0.140)

VL=

159035.84

Answer c-1)

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

Value of Levered firm = Value of unlevered firm + Value of levered firm *.35*1

VL=136770.82+VL*0.35

VL=

=136770.82/(1-0.0.35)

VL=

210416.65