Back Woods Coffee has expected earnings before interest and taxes of $34,500, an unlevered cost of capital of 14%, and debt with both a book and face value of $20,000. The debt has an annual 7%
Coupon. The tax rate is 35%. What is the value of the ﬁrm?
A) $167,179
B) $174,015
C) $177,778
D) $203,518
E) $241,414

Question

Quizplus · Accepted Answer

The correct answer is A because the value of the firm is $167,179. This can be calculated using the following formula:Value of the firm = (EBIT * (1 - Tax rate)) / (Unlevered cost of capital - (Debt / Value of the firm) * (Coupon rate * (1 - Tax rate)))Plugging in the given values, we get:Value of the firm = (34,500 * (1 - 0.35)) / (0.14 - (20,000 / Value of the firm) * (0.07 * (1 - 0.35)))Solving for the value of the firm, we get:Value of the firm = $167,179

Back Woods Coffee Has Expected Earnings Before Interest and Taxes