Tool Manufacturing has an expected EBIT of $89,000 in perpetuity and a tax rate
ID: 2719565 • Letter: T
Question
Tool Manufacturing has an expected EBIT of $89,000 in perpetuity and a tax rate of 35 percent. The firm has $210,000 in outstanding debt at an interest rate of 8.80 percent, and its unlevered cost of capital is 11 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 $89,000 in perpetuity and a tax rate of 35 percent. The firm has $210,000 in outstanding debt at an interest rate of 8.80 percent, and its unlevered cost of capital is 11 percent.
Explanation / Answer
Please find the detailed answer as follows:
Value of the Unlevered Firm = EBIT*(1-Tax Rate)/Unlevered Cost of Capital = 89,000*(1-.35)/.11 = 525,909
Value of Levered Firm = Value of the Unlevered Firm + Tax Rate*(Outstanding Debt) = 525,909 + .35*210000 = 599,409.1
Answer is 599,409.1