The Wrangler Co. has expected EBIT = $9,250, debt with a face and market value of $14,000 paying a 9% annual coupon, and an unlevered cost of capital of 12%. If the tax rate is 39%, what is the value of Wrangler's equity?
A) $38,481
B) $52,481
C) $55,635
D) $58,525
E) $65,600

Question

Quizplus · Accepted Answer

The value of equity is calculated using the formula: Value of Levered Firm = Value of Unlevered Firm + (Tax Rate * Debt). First, calculate the Value of Unlevered Firm: EBIT * (1 - Tax Rate) / Unlevered Cost of Capital = $9,250 * (1 - 0.39) / 0.12 = $47,312.50. Then, calculate the tax shield: 0.39 * $14,000 = $5,460. The value of the levered firm is $47,312.50 + $5,460 = $52,772.50. Subtract the debt to find the equity value: $52,772.50 - $14,000 = $38,772.50, which rounds to $38,481.