Janus International is an all-equity company.You are given the following information for Janus International:
EBIT = $880 000 forever
Corporate tax rate = 25%
Cost of equity = 12%
The company is in the process of issuing $1 000 000 of bonds at par that carry a 11.50% annual coupon.What is the levered value of the firm?

Question

Quizplus · Accepted Answer

The levered value of a firm can be calculated using the following formula: 
Levered value = Unlevered value + (Debt value - Cash value)
First, we need to calculate the unlevered value of the firm using the perpetuity formula: 
Unlevered value = EBIT / cost of equity 
Unlevered value = $880,000 / 12% = $7,333,333.33

Next, we need to calculate the debt value: 
Debt value = $1,000,000

Assuming the company has no cash, we can calculate the levered value: 
Levered value = $7,333,333.33 + ($1,000,000 - $0) = $8,333,333.33

However, we need to take into account the interest tax shield from the debt. The interest tax shield is the amount of tax saved by deducting interest expenses from taxable income. 
Interest tax shield = Interest expense x Tax rate 
Interest expense = $1,000,000 x 11.50% = $115,000 
Interest tax shield = $115,000 x 25% = $28,750

The levered value with the interest tax shield is: 
Levered value = $7,333,333.33 + ($1,000,000 - $28,750) = $8,304,583.33

Therefore, the best choice is C.

Janus International Is an All-Equity Company