Now imagine that Tiger Pros is 60% financed with equity and 40% financed with debt. Cost...

Now imagine that Tiger Pros is 60% financed with equity and 40% financed with debt. Cost of equity is 16.5% and after-tax cost of debt is 11%. It has the same perpetual EBIT of $500 a year but has a $120 perpetual interest expense. The firm is subject to a 21% tax rate. What is the market value of Tiger Pros?

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Expert Solution

WACC = 0.60(0.165) + 0.40(0.11)

WACC = 14.30%

Net Profit per year = (1 - 0.21)(500 - 120)

Net Profit = $300.20

Market value of firm = 300.20/0.1430

Market Value of firm = $2,099.30

jeff jeffy answered 2 years ago

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