Kline Construction is an all-equity firm that has projected perpetual earnings before interest and taxes of $628,000.The current cost of equity is 17.6 percent and the tax rate is 35percent.The company is in the process of issuing $4.3 million of 8.3 percent annual coupon bonds at par.What is the levered value of the firm?
A)$3,824,318
B)$3,541,085
C)$3,422,225
D)$2,713,185
E)$3,385,695

Question

Quizplus · Accepted Answer

The levered value of the firm is the sum of the value of the equity and the value of the debt. The value of the equity is the present value of the perpetual earnings before interest and taxes, discounted at the cost of equity. The value of the debt is the present value of the coupon payments and the principal payment, discounted at the yield to maturity.The levered value of the firm is:Value of equity = $628,000 / 0.176 = $3,568,182Value of debt = $4,300,000 * 0.083 / 0.176 + $4,300,000 / 0.176 = $256,133Levered value of the firm = $3,568,182 + $256,133 = $3,824,315Therefore, the correct answer is A.

Kline Construction Is an All-Equity Firm That Has Projected Perpetual