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Kline Construction is an all-equity firm that has projected perpetual EBIT of $312,000. The current cost...

Kline Construction is an all-equity firm that has projected perpetual EBIT of $312,000. The current cost of equity is 12.1 percent and the tax rate is 35 percent. The company is in the process of issuing $928,000 worth of perpetual bonds with an annual coupon rate of 6.3 percent at par. What is the value of the levered firm?

Multiple Choice:

A. $1,862,259

B. $1,508,430

C. $2,000,833

D. $1,676,033

E. $1,931,546

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Answer #1

C. $2,000,833

Unlevered firm value = EBIT(1 - Tax) / Cost of equity

Unlevered firm value = $312,000(1 - 0.35) / 0.121

Unlevered firm value = $1,676,033

Levered firm value = Unlevered firm value + (Debt * Tax rate)

Levered firm value = $1,676,033 + ($928,000 * 0.35)

Levered firm value = $2,000,833

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