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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? Multiple Choice

$996,421

$907,679

$1,184,929

$910,818

$1,191,506

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Expert Solution

Unlevered firm value = EBIT(1 - Tax) / Cost of equity

Unlevered firm value = $138,000(1 - 0.21) / 0.136

Unlevered firm value = $801,618

Levered firm value = Unlevered firm value + (Debt * Tax rate)

Levered firm value = $801,618 + ($520,000 * 0.21)

Levered firm value = $910,818

jeff jeffy answered 2 years ago
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