Exhibit 17.2
Kitto Electronics has an EBIT of $200,000, a growth rate of 6%, and its tax rate is 40%. In order to support growth, Kitto must reinvest 20% of its EBIT in net operating assets. Kitto has $300,000 in 8% debt outstanding, and a similar company with no debt has a cost of equity of 11%.
-Refer to Exhibit 17.2.According to the MM extension with growth,what is Kitto's value of equity?
A)$1,492,000
B)$1,529,300
C)$1,567,533
D)$1,606,721
E)$1,646,889

Question

Quizplus · Accepted Answer

The correct answer is A.The MM extension with growth formula is:Value of equity = EBIT * (1 - Tax rate) * (1 - Reinvestment rate) / (Cost of equity - Growth rate)Plugging in the numbers, we get:Value of equity = $200,000 * (1 - 0.40) * (1 - 0.20) / (0.11 - 0.06) = $1,492,000

Exhibit 17.2 Kitto Electronics Has an EBIT of $200,000, a Growth Rate