Victoria Dry Goods has expected earnings before interest and taxes of $14,600, an unlevered cost of capital of 15%, and a tax rate of 35%. The company also has $3,500 of debt that carries a 6%
Coupon. The debt is selling at par value. What is the value of this ﬁrm?

Question

Quizplus · Accepted Answer

1. Calculate the value of the unlevered firm using the formula: 
Unlevered Firm Value = EBIT / Unlevered Cost of Capital 
Unlevered Firm Value = $14,600 / 0.15 = $97,333

2. Calculate the value of debt using the formula: 
Value of Debt = coupon rate x face value / required rate of return 
Value of Debt = 0.06 x $3,500 / 0.06 = $3,500

3. Calculate the value of equity by subtracting the value of debt from the unlevered firm value: 
Value of Equity = Unlevered Firm Value - Value of Debt 
Value of Equity = $97,333 - $3,500 = $93,833

4. Calculate the value of the firm by adding the value of equity and the value of debt: 
Value of Firm = Value of Equity + Value of Debt 
Value of Firm = $93,833 + $3,500 = $97,333

However, the question asks for the value of the firm AFTER tax, so we need to adjust the value of debt:

Adjusted Value of Debt = Value of Debt x (1 - Tax Rate) 
Adjusted Value of Debt = $3,500 x (1 - 0.35) = $2,275

New Value of Firm = Value of Equity + Adjusted Value of Debt 
New Value of Firm = $93,833 + $2,275 = $96,108

Therefore, the closest answer is (C) $64,492.

Victoria Dry Goods Has Expected Earnings Before Interest and Taxes