Houston Tools has expected earnings before interest and taxes of $236,800,an unlevered cost of capital of 12.65 percent,and a tax rate of 35 percent.The company has $420,000 of debt that carries a 7 percent coupon.The debt is selling at par value.What is the value of this firm?
A)$796,758.89
B)$1,363,758.89
C)$1,216,758.89
D)$1,413,758.89
E)$1,636,758.89

Question

Quizplus · Accepted Answer

V_U = [$236,800 × (1 - .35)]/.1265 = $1,216,758.89V_L = $1,216,758.89 + (.35 × $420,000)= $1,363,758.89

Houston Tools Has Expected Earnings Before Interest and Taxes of $236,800,an