The Winter Wear Company has expected earnings before interest and taxes of $2,100,an unlevered cost of capital of 14% and a tax rate of 34%. The company also has $2,800 of debt that carries a 7% coupon. The debt is selling at par value. What is the value of this firm?
A) $9,900
B) $10,852
C) $11,748
D) $12,054
E) $12,700

Question

Quizplus · Accepted Answer

To find the value of the firm, we need to use the formula:

Value of Firm = EBIT(1 - tax rate) / unlevered cost of capital + (value of debt)

Plugging in the given values, we get:

Value of Firm = $2,100(1 - 0.34) / 0.14 + $2,800
Value of Firm = $1,386 / 0.14 + $2,800
Value of Firm = $9,900 + $2,800
Value of Firm = $10,852

Therefore, the best choice is B, $10,852.

The Winter Wear Company Has Expected Earnings Before Interest and Taxes