Tool Manufacturing has an expected EBIT of $63,000 in perpetuity and a tax rate

Question

Tool Manufacturing has an expected EBIT of $63,000 in perpetuity and a tax rate of 35 percent. The firm has $170,000 in outstanding debt at an interest rate of 7.90 percent, and its unlevered cost of capital is 12 percent.

What is the value of the firm according to M&M Proposition I with taxes? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Tool Manufacturing has an expected EBIT of $63,000 in perpetuity and a tax rate of 35 percent. The firm has $170,000 in outstanding debt at an interest rate of 7.90 percent, and its unlevered cost of capital is 12 percent.

Explanation / Answer

Hi,

Please find the detailed answer as follows:

Value of the Unlevered Firm = EBIT*(1-Tax Rate)/Unlevered Cost of Capital = 63000*(1-.35)/.12 = 341250

Value of Levered Firm = Value of the Unlevered Firm + Tax Rate*(Outstanding Debt) = 341250 + .35*170000 = 400750

Answer is 400750.

Thanks.

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