Meyer & Co. expects its EBIT to be $49,000 every year forever. The firm can borr
ID: 2722872 • Letter: M
Question
Meyer & Co. expects its EBIT to be $49,000 every year forever. The firm can borrow at 8 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 $142,000 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 $49,000 every year forever. The firm can borrow at 8 percent. Meyer currently has no debt, and its cost of equity is 11 percent.
Explanation / Answer
Meyer & Co Details Amt $ EBIT perpetual = 49,000 Tax rate =35% Tax = 17,150 Post Tax Income = 31,850 Cost of Equity =11% 1 Value of Unngeared Firm =31850/11%= $ 289,545.45 2 If debt is 142000 Interest @8%= 11,360 PV of Interest at perpetuity =11360/8%= 142,000 Tax Saving on PV of interest =35%*142000= 49,700 So Value of Firm=Value of Ungeared firm+ Tax saving on PV of Interest =289545+49700= 339,245 So Value after borrowing = $ 339,245.45