Back Woods Coffee has expected earnings before interest and taxes of $34,500, an unlevered cost of capital of 14%, and debt with both a book and face value of $20,000. The debt has an annual 7% coupon. The tax rate is 35%. What is the value of the firm?
A) $167,179
B) $174,015
C) $177,778
D) $203,518
E) $241,414

Question

Quizplus · Accepted Answer

The correct answer is A because the value of the firm is $167,179. This can be calculated using the following formula:Value of the firm = (EBIT * (1 - Tax rate)) / Unlevered cost of capital + (Debt * (1 - Tax rate))Value of the firm = ($34,500 * (1 - 0.35)) / 0.14 + ($20,000 * (1 - 0.35))Value of the firm = $167,179

Back Woods Coffee Has Expected Earnings Before Interest and Taxes