Morrow Corp. has an EBIT of $795,000 per year that is expected to continue in perpetuity. The unlevered cost of equity for the company is 12 percent and the corporate tax rate is 22 percent. The company also has a perpetual bond issue outstanding with a market value of $1.9 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 $4.8 million. Is the CFO correct?
Solution:
Using M & M proposition , the value of the firm would be :
Value of the firm = [EBIT *(1- tax rate) / kul] + debt * tax rate
Value of the firm = [7,95,000*(1- 0.22)/0.12] + 19,00,000*0.22
Value of the firm = $51,67,500 + $4,18,000= $55,85,500
The CFO of the company is not correct as the value of the firm is $55,85,500
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