Question

Bassett Fruit Farm expects its EBIT to be $373,000 a year forever. Currently, the firm has no debt. The cost of equity is 13.2 percent and the tax rate is 35 percent. The company is in the process of issuing $2.8 million worth of bonds at par that carry an annual coupon of 6.6 percent. What is the unlevered value of the firm

Answer 1

Answer:

The correct answer is $1,836,742.42.

Explanation:

According to the scenario, the given data are as follows:

EBIT = $373,000

Cost of equity = 13.2%

Tax rate = 35%

So, we can calculate the unlevered value of the firm by using following formula:

Unlevered value of the firm = EBIT × (1 - TAX RATE) ÷ COST OF EQUITY

By putting the value, we get

Unlevered value of the firm = $373,000 × ( 1 - 35%) ÷ 13.2%

= $373,000 × 0.65 ÷ 0.132

= $242,450 ÷ 0.132

= $1,836,742.42