Use the following information to answer questions 1 and 2 1. Marvin & Co. expect
ID: 2757277 • Letter: U
Question
Use the following information to answer questions 1 and 2
1. Marvin & 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.)
Value of the firm = $_______
2. 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.)
Value of the firm = $______
please shows the works, thank you
Explanation / Answer
1)
Net income = EBIT×(1-Tax)
= $49,000×(1-35%)
= $31,850
Value of the firm:
= $31,850/11%
= $289,545.45