Universal Exports Inc.is an all equity firm.At the end of the current year,the CFO expects EBIT to be $500 and the same earnings are expected annually in perpetuity.The company is not growing so CAPEX and investments in net working capital are zero.The cost of equity for Universal is 8%.Universal's prime competitor is a company called Spectre Corp.Spectre is identical to Universal Exports in every respect except that Spectre has $694.44 of long term debt outstanding.What is the value of Spectre Corp.? The corporate tax rate is 50%.

Question

Quizplus · Accepted Answer

According to M&M Proposition I (with Taxes), the value of the levered firm is equal to the unlevered firm. V_L = V_U + T × D V_U = 11ea7fdb_fc64_2c4d_a768_b97652ffbb08_TB2902_11 V_L = 11ea7fdb_fc64_2c4e_a768_affd35d8fb2f_TB2902_11 + T × D V_L = 11ea7fdb_fc64_2c4f_a768_ff214ad3ce61_TB2902_11 + 0.50 × $694.44 = $3,472.22