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New Schools is an all-equity company with an expected EBIT of $94,000 every year forever. The company can borrow at 7.4% while its cost of equity is 13.9%. What will be the value of the company if it converts to 50% debt given its total tax rate of 24%
A) 477.407.B) 500,916.C) 575,632.D) 480,690.E) 532,408.

Respuesta :

Answer: 575,632

Explanation:

First we have to calculate the current value of the unlevered firm which will be:

= EBIT(1-Tax rate) / cost of equity

= (94000 × (1 - 24%) / 3.9%

= (94000 × (1-0.24)) /0.139

= (94000 × 0.76)/0.139

= 71440/0.139

= 513,957

Then we find the value of the levered firm which will be:

= 513957 + (0.24 × 513957 × 0.5)

= 513957+ 61675

= 575,632

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