Tool Manufacturing has an expected EBIT of $67,000 in perpetuity and a tax rate
ID: 2783193 • Letter: T
Question
Tool Manufacturing has an expected EBIT of $67,000 in perpetuity and a tax rate of 35 percent. The company has $125,000 in outstanding debt at an interest rate of 7.4 percent, and its unlevered cost of capital is 10 percent.
What is the value of the company according to MM Proposition I with taxes? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Tool Manufacturing has an expected EBIT of $67,000 in perpetuity and a tax rate of 35 percent. The company has $125,000 in outstanding debt at an interest rate of 7.4 percent, and its unlevered cost of capital is 10 percent.
Explanation / Answer
EBIT = $67,000
tax rate, tC = 35%
Unlevered Cost of Capital, rU = 10%
Outstanding Debt, D = $125,000
Value of Unlevered Firm, VU = EBIT * (1-tC) / rU
Value of Unlevered Firm, VU = $67,000 * (1-0.35) / 0.10
Value of Unlevered Firm, VU = $435,500
Value of Levered Firm, VL = VU + tC * D
Value of Levered Firm, VL = $435,500 + 0.35 * $125,000
Value of Levered Firm, VL = $479,250
So, Company Value is $479,250