Homework Answers
SOLUTION:
The values provided in the question are as follows :
Value of Unlevered Firm ( currently company has no debt )= $595,000
Value of levered Firm =?
Tax Rate = 21 % or 0.21
Cost of equity =12.9 %
Tatum can borrow at a rate of =6.7 % or 0.067
Debt or Value of the company if company borrows $310,000 and uses the proceed to repurchase of shares =?
The formula to calculate the value of levered Firm
Value of levered Firm = Value of Unlevered Firm ( currently company has no debt ) + Tax Rate * Debt
Value of levered Firm =$595,000 + 0.21 *$310,000
Value of levered Firm = $595,000 + $ 65,100
Value of levered Firm = $ 660,100
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