Question

Calvert corporation expects an ebit of $25,300 every year forever. the company currently has no debt, and its cost of equity is 15.3 percent. the company can borrow at 10.1 percent and the corporate tax rate is 25 percent.
a. what is the current value of the company? (do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
b-1. what will the value of the firm be if the company takes on debt equal to 40 percent of its unlevered value? (do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
b-2. what will the value of the firm be if the company takes on debt equal to 100 percent of its unlevered value? (do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
c-1. what will the value of the firm be if the company takes on debt equal to 40 percent of its levered value? (do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
c-2. what will the value of the firm be if the company takes on debt equal to 100 percent of its levered value? (do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Answer 1

Based on the EBIT, the cost of equity, and rates attached, Calvert Corporation has the following values:

• a. $124,019.61
• b. - 1 $136,421.57
• b - 2 $155,024.51

What is the value of Calvert Corporation?

This can be found as:

=  EBIT x (1 - tax rate) / cost of an equity

= 25,300 x (1 - 25%) / 0.153

= $124,019.61

What is the value with 40% debt?

= Value of firm + (Tax rate x Debt percentage x Value of firm)

= 124,019.61 + (25% x 40% x 124,019.61)

= $136,421.57

What is the value with 100% debt?

= 124,019.61 + (25% x 100% x 124,019.61)

= $155,024.51

Find out more on a firm's levered value at brainly.com/question/14339958.

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