RoTek has a capital structure of $300,000 in equity and $300,000 in perpetual debt.The firm's cost of equity is 14 percent and its cost of debt is 9 percent.If the firm has an expected, perpetual net operating income of $120,000 and a marginal tax rate of 40 percent, what is the market value of RoTek? Assume all net income is paid out as dividends.
A)$698,571
B)$814,286
C)$818,571
D)$55,800

Question

Quizplus · Accepted Answer

Interest = $300,000(0.09) = $27,000
Net income = ($120,000 - $27,000)(1 - 0.40) = $55,800
Market value = $55,800/0.14 + $27,000/0.09 = $698,571

RoTek Has a Capital Structure of $300,000 in Equity and $300,000