M&M Arb Co.has the following characteristics: perpetual EBIT of $25,000,zero financial distress costs,unlevered cost of equity = 15%,cost of levered equity 20%,before-tax cost of debt = 10%,and the tax rate is 35%.If the value of M&M Arb is $140,000,then the D/E ratio of M&M Arb is closest to:
A) 0.2923
B) 0.5473
C) 1.8270
D) 3.4211

Question

Quizplus · Accepted Answer

Value of unlevered: $25,000(1−.35)/.15 = $108,333,$108,333+D*(.35)= $140,000.D = $90,477.E = $140,000−90,477 = $49,523.D/E = 1.8270