Elzear & Co. expects its EBIT to be $83,000 every year forever. The firm can borrow...
Elzear & Co. expects its EBIT to be $83,000 every year forever. The firm can borrow at 11%. Elzear currently has no debt, and its cost of equity is 15%.
If the tax rate is 35%, what is the value of the firm?
Value of the firm =?
What will the value be if the company borrows $144,000 and uses the proceeds to repurchase shares?
Value of the firm = ?
Homework Answers
a). Value of Firm = [EBIT * (1 - t)] / Cost of Equity
= [$83,000 * (1 - 0.35)] / 0.15 = $53,950 / 0.15 = $359,666.67
b). Value of levered firm = Value of unlevered firm + [Tax Rate * Debt Value]
= $359,666.67 + [0.35 * $144,000]
= $359,666.67 + $50,400 = $410,066.67
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