Meyer & Co. expects its EBIT to be $105,000 every year forever. The firm can bor
ID: 2713575 • Letter: M
Question
Meyer & Co. expects its EBIT to be $105,000 every year forever. The firm can borrow at 7 percent. Meyer currently has no debt, and its cost of equity is 11 percent.
If the tax rate is 35 percent, what is the value of the firm? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.)
What will the value be if the company borrows $136,000 and uses the proceeds to repurchase shares? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.)
Meyer & Co. expects its EBIT to be $105,000 every year forever. The firm can borrow at 7 percent. Meyer currently has no debt, and its cost of equity is 11 percent.
Explanation / Answer
a. The value of the levered firm is:
Value of Firm = EBIT(1 – tC)/RU
Cost of Unlevered =Cost Of Equity = 11%
V = $105,000(1 – 35%)/11%
Value of Firm = $620,454.55
b. The value of the levered firm is:
V = VU + tC x D
V = $620,454.55 + .35($136,000)
V = $668,054.55