Please help, ONLY NEED HELP ON c-1 and c-2 only. Jet Corporation expects an EBIT
ID: 2716552 • Letter: P
Question
Please help, ONLY NEED HELP ON c-1 and c-2 only.
Jet Corporation expects an EBIT of 25,300 dollars 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
Answer:c-1 Calculation of the value of the firm be if the company takes on debt equal to 60 percent of its levered value:
NOPAT=EBIT(1-tax rate)
=25300(1-0.35)
=16445
WACC=11%0.40+8%(1-0.35)*0.60
=7.52%
Value of Firm = NOPAT/WACC
Value of Firm = 16445/7.52%
Value of Firm = $ 218683.51
Answer:c-2 Calculation of the value of the firm be if the company takes on debt equal to 100 percent of its levered value:
NOPAT=EBIT(1-tax rate)
=25300(1-0.35)
=16445
WACC=8%(1-0.35)
=5.2%
Value of Firm = NOPAT/WACC
Value of Firm = 16445/5.2%
Value of Firm = $316250