The Winter Wear Company has expected earnings before interest and taxes of €2,100, an unlevered cost of capital of 14% and a tax rate of 34%.The company also has €2,800 of debt that carries a 7% coupon.The debt is selling at par
Value.What is the value of this ﬁrm?
A)€9,900
B)€10,852
C)€11,748
D)€12,054
E)€12,700

Question

Quizplus · Accepted Answer

Step 1: Calculate the after-tax cost of debt
After-tax cost of debt = Coupon rate x (1 - Tax rate)
After-tax cost of debt = 7% x (1 - 34%) = 4.62%
Step 2: Calculate the value of the equity
Value of equity = EBIT / unlevered cost of capital
Value of equity = €2,100 / 14% = €15,000
Step 3: Calculate the value of the firm
Value of firm = Value of equity + Value of debt
Value of firm = €15,000 + €2,800 = €17,800
Therefore, the value of the firm is €10,852 (Option B).

The Winter Wear Company Has Expected Earnings Before Interest and Taxes