A firm is currently financed with 50% equity and 50% debt.The firm generates perpetual earnings after taxes and interest rates of $10 million per year.The firm's cost of equity is 14%,its cost of debt is 7%,and it has a tax rate of 30%.What is the value of the levered firm?

Question

Quizplus · Accepted Answer

Firstly, we need to find the weighted average cost of capital (WACC):
WACC = (Cost of Equity * % Equity) + (Cost of Debt * % Debt) * (1 - Tax Rate)
WACC = (0.14 * 0.5) + (0.07 * 0.5) * (1 - 0.30) = 0.105 or 10.5%

Next, we can use the perpetual earnings formula to calculate the value of the levered firm:
Value of levered firm = Earnings / WACC
Value of levered firm = $10 million / 0.105 = $105.8 million

Therefore, the correct answer is C, $105.8 million.

A Firm Is Currently Financed with 50% Equity and 50