Question

Calculate the market value of a firm with total assets of $60 million and a net worth of $35 million. The firm's cost of equity is 15%, and the cost of perpetual debt is 8%. The firm has a perpetual net operating income (EBIT) of $4.5 million and a marginal tax rate of 35%. $41.67 million $30.00 million $35.83 million $30.83 million 3 pts Ouoction 6

Answer 1

C.$35.83 million.

amount of debt = total assets value - net worth

=>60 million - 35 million

=>25 million.

EBIT	$4.5 m
less: interest on debt (25 million*8%)	(2.0 m)
EBT	2.5 m
less: tax @35%	(0.875)
net income	1.625

value of equity = net income / cost of equity

=>1.625/0.15

=>$10.83333 million

market value of the firm = value of equity + value of debt

=>$10.83 million + 25 million

=>$35.83 million