New Schools,Inc.expects an EBIT of $7,000 every year forever.The firm currently has no debt,and its cost of equity is 15 percent.The firm can borrow at 8 percent and the corporate tax rate is 34 percent.What will the value of the firm be if it converts to 50 percent debt?
A)$31,796.47
B)$36,036.00
C)$37,407.16
D)$37,552.08
E)$38,119.30

Question

Quizplus · Accepted Answer

V_U = $7,000 (1 - 0.34)/0.15 = $30,800.00V_L = $30,800.00 + 0.34 (0.50) ($30,800.00) = $36,036.00Note: When levered, the value of debt is equal to one-half of the unlevered value of the firm.