Lester's has expected earnings before interest and taxes of $74,800, an unlevered cost of capital of 11.6 percent, and debt with both a book and face value of $84,000. The debt has a coupon rate of 6.35 percent and the tax rate is 24 percent. What is the value of this company?
A) $403,136
B) $347,600
C) $510,229
D) $387,094
E) $428,507

Question

Quizplus · Accepted Answer

First, we need to find the weighted average cost of capital (WACC) using the unlevered cost of capital and the debt information:
WACC = (11.6% * (1 - 0.24) * (1 - 0.0635) * (84000/74800)) + (0.0635 * (1 - 0.24) * (84000/74800))
WACC = 0.1038 or 10.38%
Next, we can calculate the value of the company using the free cash flow to the firm (FCFF) approach:
FCFF = EBIT(1 - tax rate) + depreciation and amortization - capital expenditures - changes in net working capital
FCFF = 74800(1-0.24) + 0 - 0 - 0 = 56832
Value of the company = FCFF / WACC = 56832 / 0.1038 = $510,229
Therefore, the best choice is C.

Lester's Has Expected Earnings Before Interest and Taxes of $74,800