Question

18. Firm Value Cavo Corporation expects an EBIT of $26,850 every year forever The company currently has no debt, and its cost of equity is 14 percent. The tax rate is 35 percent. a. What is the current value of the company? b. Suppose the company can borrow at 8 percent. What will the value of the company bo if it takes on debt equal to 50 percent of its unlevered value? What if it takes on equal to 100 percent of its unlevered value? c. What will the value of the company be if it takes on debt equal to 50 percent its levered value? What if the company takes on debt equal to 100 percent of of levered value?

Answer 1

Ans-

1)current value of the company:

V_{​​​​​​f}​​​​​=Earnings after tax/K_{​​​​​​o}

V_{​​​​​​f} =value of the firm

K_{​​​​​​o}​​​​​ =cost of the capital

V_{​​​​​​f}​​​​​ =$26,850(1-0.35)/0.14

V_{​​​​​​f}​​​​​ =$124,660(approx)

b)

C)