RoTek has a capital structure of $300,000 in equity and $300,000 in perpetual debt. The firm's cost of equity is 14% and its cost of debt is 9%. If the firm has an expected, perpetual net operating income of $120,000 and a marginal tax rate of 40%, what is the market value of RoTek? Assume all net income is paid out as dividends.
A) $698,571
B) $814,286
C) $818,571
D) $55,800

Question

Quizplus · Accepted Answer

The correct answer is A. The market value of RoTek is $698,571. This is calculated as follows:Market value of equity = $300,000 / (14% - 40% * 14%) = $600,000Market value of debt = $300,000 / (9% - 40% * 9%) = $98,571Market value of RoTek = $600,000 + $98,571 = $698,571

RoTek Has a Capital Structure of $300,000 in Equity and $300,000