Answer:
Value of Levered Firm is 1,728,095
Explanation:
As company has total equity based, So, the cost of equity will be the discount rate to calculate the value of equity.
Value of Equity = $360,000 ( 1 - 0.4 ) / 13.3% = $1,624,060
Value of Debt = $976,000
Total value = $1,624,060 + $976,000 = $2,600,060
Now calculate the WACC
WACC = (13.3% x $1,624,060/$2,600,060) + (5.9% x $976,000/$2,600,060)
WACC = 8.3% + 2.2%
WACC = 10.5%
Now Assuming the EBIT remains the same.
Value of the firm = [ ( $360,000- (976,000 x 5.9%) ) x ( 1 - 0.4 ) ] / 10.5%
Value of the firm = $181,450 / 0.105 = 1,728,095
