Montana Hills SA has expected earnings before interest and taxes of €8,100,an unlevered cost of capital of 11%,and debt with both a book and face value of €12,000.The debt has an annual 8% coupon.The tax rate is 34%.What is the value of the firm?
A)€48,600
B)€50,000
C)€52,680
D)€56,667
E)€60,600

Question

Quizplus · Accepted Answer

First, we need to find the weighted average cost of capital (WACC).
WACC = (E/V * Cost of equity) + (D/V * Cost of debt) * (1 - tax rate)
where:
E = market value of equity = ?
V = total firm value = ?
D = market value of debt = €12,000
Cost of equity = unlevered cost of capital = 11%
Cost of debt = 8%
Tax rate = 34%

We can find E by rearranging the equation as:
V = E + D
V = E + €12,000

And then substitute into the WACC equation:
11% = (E/(E+€12,000) * 11%) + (€12,000/(E+€12,000) * 8%) * (1-34%)
Solving for E, we get:
E = €43,320

Therefore, the total firm value (V) is:
V = €43,320 + €12,000
V = €52,320

So the answer is C) €52,680

Montana Hills SA Has Expected Earnings Before Interest and Taxes