An unlevered ﬁrm has a cost of capital of 16% and earnings before interest and taxes of $225,000. A levered ﬁrm with the same operations and assets has both a book value and a face value of debt
Of $850,000 with an 8% annual coupon. The applicable tax rate is 34%. What is the value of the
Levered ﬁrm?
A) $928,125
B) $1,110,125
C) $1,178,125
D) $1,217,125
E) $1,778,125

Question

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The Answer of An unlevered ﬁrm has a cost of capital of 16% and earnings before interest and taxes of $225,000. A levered ﬁrm with the same operations and assets has both a book value and a face value of debt
Of $850,000 with an 8% annual coupon. The applicable tax rate is 34%. What is the value of the
Levered ﬁrm?
A) $928,125
B) $1,110,125
C) $1,178,125
D) $1,217,125
E) $1,778,125

An Unlevered ﬁRm Has a Cost of Capital of 16