Question

Tool Manufacturing has an expected EBIT of $ 39,000 in perpetuity and a tax rate of 33 percent. The firm has $ 80,000 in outstanding debt at an interest rate of 11 percent, and its unlevered cost of capital is 15 percent. The value of the firm is $____ according to MM Proposition I with taxes.

Answer 1

Answer:

$208,530

Explanation:

The computation of value of levered firm is shown below:-

For computing the value of levered firm first we need to compute the Value of Unleavened firm

Value of unlevered firm = Earning before interest and tax × (1 - tax rate) ÷ Cost unlevered of Capital

= $39,000 × (1 - 33%) ÷ 15%

= $39,000 × 0.67 ÷ 15%

= $39,000 × 4.67

= $182,130

Now, the Value of levered firm = Value of unlevered firm + Outstanding debt × Tax rate

= $182,130  + $80,000 × 33%

= $182,130  + $26,400

= $208,530