An unlevered firm has a cost of capital of 14.6 percent and earnings before interest and taxes of $223,000.Assume the firm borrows $700,000 at a 7 percent rate of interest.The applicable tax rate is 34 percent.What is the value of the levered firm?
A)$1,946,082.19
B)$1,907,018.11
C)$1,246,082.19
D)$546,082.19
E)$547,018.11

Question

Quizplus · Accepted Answer

V_U = [$223,000 × (1 - .34)]/.146 = $1,008,082.19V_L = $1,008,082.19 + (.34 × $700,000)= $1,246,082.19

An Unlevered Firm Has a Cost of Capital of 14