Ch15-1.) Firm Value Connor Corp. has an EBIT of $460,000 per year that is expected to...
Ch15-1.) Firm Value Connor Corp. has an EBIT of $460,000 per year that is expected to continue in perpetuity. The unlevered cost of equity for the company is 13.2 percent, and the corporate tax rate is 35 percent. The company also has a perpetual bond issue outstanding with a market value of $950,000. a. What is the value of the company? b. The CFO of the company informs the company president that the value of the company is $2.4 million. Is the CFO correct?
Homework Answers
a. The value of the company is computed by using the below formula:
= EBIT ( 1 - tax rate ) / cost of equity + tax rate x market value of bond outstanding
= $ 460,000 ( 1 - 0.35 ) / 0.132 + 0.35 x $ 950,000
= $ 2,597,651.515 or $ 2.60 Million Approximately
b. No the CFO is not correct since the value of the company as determined by him differs from the value that we have computed in part a.
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