Question

Jericho Snacks is an all-equity firm with estimated earnings before interest and taxes of $624,000 annually forever. Currently, the firm has no debt but is considering borrowing $725,000 at 6.75 percent interest. The tax rate is 25 percent and the current cost of equity is 15.2 percent. What is the value of the levered firm

Answer 1

Value of levered firm is $2,922,171.

What is Finance?

• The term "finance" refers to issues including the development, management, and study of money and investments. It entails employing future income flows to finance current initiatives through the use of credit and debt, securities, and investment.
• Finance is strongly tied to the time value of money, interest rates, and other related topics because of its temporal component.

• There are numerous further specialized classifications, such as behavioral finance, which aims to pinpoint the cognitive (e.g., emotional, social, and psychological) drivers of financial decisions.
• Typically, "finance" is divided into three major categories: Taxation systems, government spending, budgeting practices, stabilization tools and policies, debt problems, and other governmental difficulties are all considered to be a part of public finance.
• Managing a company's assets, liabilities, revenues, and debts is part of corporate finance.

VU = [$624,000 ×(1 -.35)]/.152 = $2,668,421.05

The Value of the levered Firm is:

VL = $2,668,421.05 + (.35 ×$725,000) = $2,922,171

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