Question

Total Manufacturing has an expected EBIT of $40,000 per year in perpetuity and a tax rate...

  1. Total Manufacturing has an expected EBIT of $40,000 per year in perpetuity and a tax rate of 20%. The firm currently has no debt. Its cost of debt is 8% and unlevered cost of capital is 14%. If the firm changes its capital structure by borrowing $120,000 to repurchase the same amount of equity, what would be the firm's value under the new capital structure?

0 0
Add a comment Improve this question Transcribed image text
Answer #1

Solution :-

Value of Unlevered Firm is calculated = EBIT * ( 1 - Tax ) / UL Ke   

Where EBIT = $40,000

Tax Rate = 20%

UL Ke ( Unlevered Cost of Capital ) = 14%

Now Value of Unlevered Firm = $40,000 * ( 1 - 0.20 ) / 0.14 = 228,571.40

Value of Levered Firm = Value of Unlevered Firm + ( Debt * Tax )

Value of Levered Firm = 228,571.40 + ( $120,000 * 0.20 ) = $252,571.4

Firm Value = $252,571.40

Add a comment
Know the answer?
Add Answer to:
Total Manufacturing has an expected EBIT of $40,000 per year in perpetuity and a tax rate...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions
  • Tool Manufacturing has an expected EBIT of $51,000 in perpetuity and a tax rate of 21...

    Tool Manufacturing has an expected EBIT of $51,000 in perpetuity and a tax rate of 21 percent. The firm has $126,000 in outstanding debt at an interest rate of 5.35 percent, and its unlevered cost of capital is 9.6 percent. What is the value of the firm according to M&M Proposition I with taxes? Should the company change its debt-equity ratio if the goal is to maximize the value of the firm? Explain.

  • Tool Manufacturing has an expected EBIT of $83,000 in perpetuity and a tax rate of 25...

    Tool Manufacturing has an expected EBIT of $83,000 in perpetuity and a tax rate of 25 percent. The company has $145,000 in outstanding debt at an interest rate of 6.5 percent and its unlevered cost of capital is 14 percent.    What is the value of the company according to MM Proposition I with taxes?

  • Tool Manufacturing has an expected EBIT of $82,000 in perpetuity and a tax rate of 35...

    Tool Manufacturing has an expected EBIT of $82,000 in perpetuity and a tax rate of 35 percent. The firm has $165,000 in outstanding debt at an interest rate of 8.5 percent, and its unlevered cost of capital is 15 percent. What is the value of the firm according to MM Proposition I with taxes? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Value of the firm           $

  • Tool Manufacturing has an expected EBIT of $71,000 in perpetuity and a tax rate of 23...

    Tool Manufacturing has an expected EBIT of $71,000 in perpetuity and a tax rate of 23 percent. The company has $127,000 in outstanding debt at an interest rate of 6.8 percent and its unlevered cost of capital is 14 percent.    What is the value of the company according to MM Proposition I with taxes? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

  • Tool Manufacturing has an expected EBIT of $77,000 in perpetuity and a tax rate of 24...

    Tool Manufacturing has an expected EBIT of $77,000 in perpetuity and a tax rate of 24 percent. The company has $136,000 in outstanding debt at an interest rate of 6.5 percent and its unlevered cost of capital is 12 percent.    What is the value of the company according to MM Proposition I with taxes? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

  • Sunshine Trading Company (STC) has an expected EBIT of $30,000 in perpetuity, and a tax rate...

    Sunshine Trading Company (STC) has an expected EBIT of $30,000 in perpetuity, and a tax rate of 40%. Interest rate on STC’s debt is 8%, and its return on equity is 13.12%. Debt-equity ratio of STC is 0.6, or 3/5. Blackstone Inc (BI) is an all-equity firm, which is identical to STC, except for the capital structure. (1) What is the value of STC?                              (2) What is the value of BI?                                 (3) What is the rate of...

  • Sunshine Trading Company (STC) has an expected EBIT of $30,000 in perpetuity, and a tax rate...

    Sunshine Trading Company (STC) has an expected EBIT of $30,000 in perpetuity, and a tax rate of 40%. Interest rate on STC’s debt is 8%, and its return on equity is 13.12%. Debt-equity ratio of STC is 0.6, or 3/5. Blackstone Inc (BI) is an all-equity firm, which is identical to STC, except for the capital structure. (1) What is the value of STC?                        (2) What is the value of BI?                          (3) What is the rate of...

  • Sunshine Trading Company (STC) has an expected EBIT of $20,000 in perpetuity, and a tax rate...

    Sunshine Trading Company (STC) has an expected EBIT of $20,000 in perpetuity, and a tax rate of 40%. Interest rate on STC’s $45,000 debt is 8%, and its WACC is 10%. Blackstone Inc (BI) is an all-equity firm, which is identical to STC, except for the capital structure. (1) What is the value of STC?                                   (2) What is the value of BI?                                      (3) What is the rate of return on BI shares?                                     (4) What is the...

  • •Blue Inc. has no debt and is expected to generate $4 million in EBIT in perpetuity....

    •Blue Inc. has no debt and is expected to generate $4 million in EBIT in perpetuity. Tc=30%. All after-tax earnings are paid as dividends.The firm is considering a restructuring, with a perpetual fixed $10 million in floating rate debt at an expected interest rate of 8%. The unlevered cost of equity is 18%. •What is the current value of Blue? •What will the new value be after the restructuring? •What will the new required return on equity be? •What if...

  • Company G expects its EBIT to be $92,000 every year forever. The firm can borrow at...

    Company G expects its EBIT to be $92,000 every year forever. The firm can borrow at 9%. It currently has no debt, and its cost of equity is 25%. The tax rate is 35%. The firm is considering borrowing $ 60,000 in debt to achieve a new capital structure. a) What is the value of the firm in current capital structure? b) What will the value be if the company borrows $60,000 and uses the proceeds to repurchase shares? c)...

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT