Cede & Co. expects its EBIT to be $109,000 every year forever. The company can borrow at 7 percent . The company currently has no debt and its cost of equity,is 13 percent.
a. If the,tax rate is 23 percent, what is the value of
the company?
b. What will the,value be if the company borrows $225,000 and uses
the proceeds to repurchase shares?
a. Value of the firm
b. Value of,the,firm..
a). Value of unlevered firm = [EBIT x (1 - t)] / kE
= [$109,000 x (1 - 0.23)] / 0.13 = $645,615.38
b). Value of Equity = $645,615.38 - $225,000 = $420,615.38
WACC = [wD x kD x (1 - t)] + [wE x kE]
= [(225,000 / 645,615.38) x 7% x (1 - 0.23)] + [(420,615.38 / 645,615.38) x 13%]
= 1.88% + 8.47% = 10.35%
Value of Levered Firm = [(EBIT - Interest) x (1 - t)] / WACC
= [{$109,000 - ($225,000 x 0.07)} x (1 - 0.23)] / 0.1035
= $71,802.50 / 0.1035 = $693,886.15
Cede & Co. expects its EBIT to be $109,000 every year forever. The company can borrow...