Question

Tatum can borrow at 6.7 percent. The company currently has no debt and the cost of equity is 11.1 percent. The current value of the firm is $625,000. The corporate tax rate is 21 percent. What will the value be if the company borrows $340,000 and uses the proceeds to repurchase shares?

Answer 1

Answer:

$696400

Explanation:

The values given are as follows:

Tax rate= 21%, 21/100= 0.21

Equity cost= 11.1%

Value of Unlevered Firm= $625,000

Rate at which Tantum can borrow=6.7%, 6.7/100=0.067

Amount of value if the company ends up borrowing=$340,000

Value of levered Firm =?

The formular for finding the value of levered Firm is:

Value of Unlevered Firm + Tax Rate * Debt

=$625,000 + 0.21 *$340,000

= $625,000 + $ 71,400

= $ 696,400

Thus, the value of levered firm is $696,400.