The Aggie Company has EBIT of $50,000 and market value debt of $100,000 outstanding with a 9% coupon rate. The cost of equity for an all equity firm would be 14%. Aggie has a 35% corporate tax rate. Investors face a 20% tax rate on debt receipts and a 15% rate on equity. Determine the value of Aggie.
A) $120,000
B) $162,948
C) $258,537
D) $263,080
E) $332,143

Question

Quizplus · Accepted Answer

The value of Aggie can be calculated using the Modigliani-Miller theorem with taxes. The formula for the value of a levered firm is: VL = VU + (Tax rate * Debt). First, calculate the value of an unlevered firm (VU) using the formula VU = EBIT * (1 - Tax rate) / Cost of equity. Then, add the tax shield from debt to find VL.

The Aggie Company Has EBIT of $50,000 and Market Value