Question

Firm C currently has 320,000 shares outstanding with current market value of $33 per share and generates an annual EBIT of $1,500,000. Firm C also has $1 million of debt outstanding. The current cost of equity is 9 percent and the current cost of debt is 6 percent. The firm is considering issuing another $3 million of debt and using the proceeds of the debt issue to repurchase shares (a pure capital structure change). It is estimated that the cost of the new debt will be 7 percent and that the cost of equity will rise to 10 percent with the additional debt. The marginal tax rate is 34 percent. a. What is the current market value of the firm

Answer 1

Answer: $11,560,000

Explanation:

Market value = Equity + Debt

Equity = 320,000 shares * 33

= $‭10,560,000‬

Debt = $1,000,000

Market value = 10,560,000 + 1,000,00

= $11,560,000