Great Lakes Shipping is an all-equity firm with anticipated earnings before interest and taxes of $386,000 annually forever.The present cost of equity is 17.1 percent.Currently, the firm has no debt but is considering borrowing $1.48 million at 8.5 percent interest.The tax rate is 35 percent.What is the value of the levered firm?

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Quizplus · Accepted Answer

The value of the levered firm is $2,006,519. This is calculated as follows:Value of the unlevered firm = $386,000 / 0.171 = $2,251,462Interest expense = $1.48 million * 0.085 = $125,800Tax savings = $125,800 * 0.35 = $44,030Value of the levered firm = $2,251,462 + $44,030 = $2,006,519

Great Lakes Shipping Is an All-Equity Firm with Anticipated Earnings