Eccles Inc., a zero growth firm, has an expected EBIT of $100,000 and a corporate tax rate of 30%. Eccles uses $500,000 of 12.0% debt, and the cost of equity to an unlevered firm in the same risk class is 16.0%.
-Refer to the data for Eccles Inc.What is the value of the firm according to MM with corporate taxes?
A) $475,875
B) $528,750
C) $587,500
D) $646,250
E) $710,875

Question

Quizplus · Accepted Answer

$ \mathrm{T}_{\mathrm{c}}: 30 \% $  $ \quad $$ \quad $$ \quad $$ \quad $$ \quad $$ \quad $$ \quad $$ \quad $$ \quad $EBIT: $ \$ 100,000 $
$ \mathrm{r}_{\mathrm{s}}U:16 \% $$ \quad $$ \quad $$ \quad $$ \quad $$ \quad $$ \quad $$ \quad $$ \quad $$ \quad $Debt: $ \$ 500,000 $ 
 $\begin{array}{l}
\quad \begin{array}{l}
\quad\quad \quad \quad \quad \quad \quad \quad V_{U}=E B I T(1-T) r_{s U}= \
\quad\quad \quad \quad \quad \quad \quad \quad \$ 100,000(0.7) / 0.16=\$ 437,500
\end{array} \
V_{L}=V_{U}+T D= \
\$ 437,500+0.3(\$ 500,000)=& \$587,500
\end{array}$