Please help, ONLY NEED HELP WITH C1 and C2 only Jet Corporation expects an EBIT

Question

Please help, ONLY NEED HELP WITH C1 and C2 only

Jet Corporation expects an EBIT of $25,300 every year forever. The company currently has no debt, and its cost of equity is 11 percent. The corporate tax rate is 35 percent. What is the current value of the company? Suppose the company can borrow at 8 percent. What will the value of the firm be if the company takes on debt equal to 60 percent of its unlevered value? Suppose the company can borrow at 8 percent. What will the value of the firm be if the company takes on debt equal to 100 percent of its unlevered value? What will the value of the firm be if the company takes on debt equal to 60 percent of its levered value? What will the value of the firm be if the company takes on debt equal to 100 percent of its levered value?

Explanation / Answer

C-1)

WACC = Weight of Equity* Cost of Equity + Weight of Debt* After Tax cost of Debt

WACC = (1-60%)*11+60%*8*(1-35%)

WACC = 7.52%

Value of the firm = EBIT*(1-tax rate)/WACC

Value of the firm = 25300*(1-35%)/7.52%

Value of the firm = $ 218,683.51

C-2)

WACC = Weight of Equity* Cost of Equity + Weight of Debt* After Tax cost of Debt

WACC = (1-100%)*11+100%*8*(1-35%)

WACC = 5.20%

Value of the firm = EBIT*(1-tax rate)/WACC

Value of the firm = 25300*(1-35%)/5.2%

Value of the firm = $ 316,250

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