Question

the montana hills co. has expected earnings before interest and taxes of $8,100, an unlevered cost of capital of 11%, and debt with both a book and face value of $12,000. the debt has an annual 8% coupon. the tax rate is 34%. what is the value of the firm? you can assume that the debt is perpetual.

Answer 1

The value of the firm is $52,680

calculation of the firm's value

The Montana hills co. has expected earnings before interest and taxes of $8,100

Debt with both a book and face value of $12,000.

Finding the VU is the first step.

VU= [$8,100 ×(1 - .34) ] ÷.11

VU=($8,100×0.66)÷.11

VU=$5,346÷11

VU = $48,600

Let's now determine the firm's value.

VL= $48,600 + (.34 ×$12,000)

VL=$48,600+$4,080

VL= $52,680

Hence, the company's valuation will be $52,680.

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