Graceful Funeral Group expects its earnings before interest and taxes to be $325,000 a year forever.Currently, the firm has no debt.The cost of equity is 19.5 percent and the tax rate is 21 percent.The company is in the process of issuing $3.7 million of bonds at par that carry an annual coupon rate of 6.5 percent.What is the unlevered value of the firm?
A)$1,455,524
B)$1,416,066
C)$1,191,500
D)$1,053,420
E)$1,316,667

Question

Quizplus · Accepted Answer

The unlevered value of the firm is calculated as the present value of the perpetual earnings before interest and taxes (EBIT) discounted at the cost of equity. The formula is: Unlevered Value = EBIT * (1 - Tax Rate) / Cost of Equity. Substituting the given values: $325,000 * (1 - 0.21) / 0.195 = $1,316,667.

Graceful Funeral Group Expects Its Earnings Before Interest and Taxes