Question

L.A. Clothing has expected earnings before interest and taxes of $63,300, an unlevered cost of capital of 14.7 percent, and a combined tax rate of 23 percent. The company also has $11,000 of debt that carries a coupon rate of 7 percent. The debt is selling at par value. What is the value of this company? Multiple Choice $342,579 $284,108 $334,101

Answer 1

Answer:

Value of the company is $334,101

Explanation:

Value of unlevered firm = $\frac{EBIT(1-t)}{ke}$

Where;

EBIT = Earnings before interest and tax

t = tax rate

ke = Cost of equity (cost of capital)

Value of unlevered firm = $\frac{63,300(1-0.23)}{0.147}$

value of unlevered firm = $331,571.43

Value of firm = Value of unlevered firm + Debt (tax rate)

Value of firm = $331,571.43 + $11,000*(23%)

Value of firm = $334,101.43

Value of firm = $334,101