The Montana Mount Co.has expected earnings before interest and taxes of $8,100,an unlevered cost of capital of 11%,and debt with both a book and face value of $12,000.The debt has an annual 8% coupon.The tax rate is 34%.What is the value of the firm?
A)$48,600
B)$50,000
C)$52,680
D)$56,667
E)$60,600

Question

Quizplus · Accepted Answer

We can use the following formula to calculate the value of the firm:

V = EBIT / (Unlevered cost of capital - Tax-adjusted cost of debt)

First, we need to calculate the tax-adjusted cost of debt:

Tax-adjusted cost of debt = Cost of debt x (1 - Tax rate)
= 0.08 x (1 - 0.34)
= 0.0528

Now, we can calculate the value of the firm:

V = 8,100 / (0.11 - 0.0528)
= 52,680

Therefore, the value of the firm is $52,680. Option C is the correct answer.