Morrow Corp. has an EBIT of $945,000 per year that is expected to continue in perpetuity. The unlevered cost of equity for the company is 15 percent and the corporate tax rate is 22 percent. The company also has a perpetual bond issue outstanding with a market value of $2.65 million. What is the value of the company? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89) The CFO of the company informs the company president that the value of the company is $4.7 million. Is the CFO correct?
a). VL = [{EBIT * (1 - tC)} / rU] + [tC * D]
= [{$945,000 * (1 - 0.22)} / 0.15] + [0.22 * $2,650,000]
= $4,914,000 + $583,000 = $5,497,000
b). The CFO may be correct. The value calculated in part a does not include the costs of any non-marketed claims, such as bankruptcy or agency costs.
Morrow Corp. has an EBIT of $945,000 per year that is expected to continue in perpetuity....
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