Meyer & Co. expects its EBIT to be $52,000 every year forever. The firm can borr
ID: 2720712 • Letter: M
Question
Meyer & Co. expects its EBIT to be $52,000 every year forever. The firm can borrow at 9 percent. Meyer currently has no debt, and its cost of equity is 12 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.) Value of the firm $ What will the value be if the company borrows $129,000 and uses the proceeds to repurchase shares? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.)
Value of the firm $
Explanation / Answer
EBIT = $52,000
Tax rate = 35%
Required rate of return = 12%
Current value of firm is calculated below:
Value of firm = EBIT × (1 – tax rate) / required rate of return
= $52,000 × (1 – 35%) / 12%
= $33,800 / 12%
= $281.666.67
Hence, current value of firm is $281.667.67.
Company borrow = $129,000
Interest rate = 9%
Value of levered firm = $281,667.67 + $129,000 × .35
= $281,667.67 + $45,150
= $326,817.67
Hence, value of levered firm $326,817.67.