Answer:
$1,879,215.61
Explanation:
Given that,
EBIT = $320,000
Current cost of equity = 12.3%
Tax rate = 40 percent
Value of perpetual bonds = $936,000
Annual coupon rate = 6.5 percent at par
Value of the unlevered firm:
= [EBIT × (1 - Tax rate)] ÷ Current cost of equity
= [$320,000 × (1 - 0.4)] ÷ 0.123
= $192,000 ÷ 0.123
= $1,560,975.61
Value of the levered firm:
= Value of the unlevered firm + (Tax rate × Value of perpetual bonds)
= $1,560,975.61 + (0.34 × $936,000)
= $1,560,975.61 + $318,240
= $1,879,215.61
