Question

Calvert Corporation expects an EBIT of $25,300 every year forever. The company currently has no debt, and its cost of equity is 15.3 percent. The company can borrow at 10.1 percent and the corporate tax rate is 25 percent. a. What is the current value of the company

Answer 1

Answer:

Value of the company = $124,019.61

Explanation:

The value of then firm is the present value of its expected future cash inflow discounted at its required rate of return.

In this case, the earnings available to ordinary shareholders becomes the annual cash inflow while the appropriate discount rate is the cost of equity.

The absence of debt in the company's capital structure implies that the cost of equity would be the appropriate discount rate.

And the  value of the company would be determined as follows

Value of the company = Earnings after tax/Cost of equity

Earnings after tax = EBIT × (1-Tax rate)= 25,300×(1-0.25)=18,975

Cost of equity = 15.3%

Value of the company = 18975 /0.153= 124,019.6078

Value of the company = $124,019.61