UNLEV has an expected perpetual EBIT = $4,000. The unlevered cost of capital = 15% and there are 20,000 shares of stock outstanding. The ﬁrm is considering issuing $8,800 in new par bonds to
Add ﬁnancial leverage to the ﬁrm. The proceeds of the debt issue will be used to repurchase equity.
The cost of debt = 10% and the tax rate = 34%. There are no ﬂotation costs.
If there were no taxes, what would be the value of UNLEV before the restructuring?
A) $15,930
B) $17,600
C) $18,519
D) $26,667
E) $30,000

Question

Quizplus · Accepted Answer

The value of an unlevered firm without taxes is calculated as EBIT divided by the unlevered cost of capital. Here, it is $4,000 / 0.15 = $26,667.

UNLEV Has an Expected Perpetual EBIT = $4,000