UNLEV has an expected perpetual EBIT = $4,000. The unlevered cost of capital = 15% and there are 20,000 shares of stock outstanding. The firm is considering issuing $8,800 in new par bonds to add financial leverage to the firm. The proceeds of the debt issue will be used to repurchase equity. The cost of debt = 10% and the tax rate = 34%. There are no flotation costs.

If there were no taxes, what would be the value of UNLEV before the restructuring?
A) $15,930
B) $17,600
C) $18,519
D) $26,667
E) $30,000

Question

UNLEV has an expected perpetual EBIT = $4,000. The unlevered cost of capital = 15% and there are 20,000 shares of stock outstanding. The firm is considering issuing $8,800 in new par bonds to add financial leverage to the firm. The proceeds of the debt issue will be used to repurchase equity. The cost of debt = 10% and the tax rate = 34%. There are no flotation costs.

If there were no taxes, what would be the value of UNLEV before the restructuring?

If there were no taxes, what would be the value of UNLEV before the restructuring?
A) $15,930
B) $17,600
C) $18,519
D) $26,667
E) $30,000

Quizplus · Accepted Answer

The value of UNLEV before restructuring, without considering taxes, can be calculated using the formula for the value of an unlevered firm: $ V = \frac{EBIT}{r_u} $, where $EBIT = \$4,000$ and $r_u = 15\%$. Thus, $ V = \frac{\$4,000}{0.15} = \$26,667 $.

UNLEV Has an Expected Perpetual EBIT = $4,000