Pokie Industries, Inc (PII) is expected to generate perpetual EBIT of $2,100. If PII had no...

Pokie Industries, Inc (PII) is expected to generate perpetual EBIT of $2,100. If PII had no debt in its capital structure, its (unlevered) stockholder required return would equal 14 percent. (The corporate tax rate for the firm is 35 percent.) PII, however does have $3,000 of debt, and that debt has a a 6 percent coupon and sells at par. Assume the M&M theory of capital structure is valid.

What is the value of this firm?

Expert Solution

As per MM Proposition I (With Taxes) VL = VUL + t×D

Where VL is the value of levered company i.e. company with some debt in its capital structure, VUL is the value of an un-levered company i.e. with no or lower debt, t is the tax rate and D is the absolute amount of debt.

			Vlu	Vl
EBIT	2100	EBIT	2100	2100
Cost of Equity	14%	Intrest	0	180
Tax rate	35%	EBT	2100	1920
Debt	3000	Tax	1365	1248
Coupon Rate	6%	EAT	735	672
		Value	5250	6300

The answer is Vl=6300

Below is sheet containing formulaes:

jeff jeffy answered 1 year ago

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