O’Connell & Co. expects its EBIT to be $83,000 every year forever. The firm can borrow at 11 percent. O’Connell currently has no debt, and its cost of equity is 15 percent.

1. If the tax rate is 35 percent, what is the value of the firm? (Round your answer to 2 decimal places. (e. g., 32.16)

2. What will the value be if the company borrows $144,000 and uses the proceeds to repurchase shares? (Round your answer to 2 decimal places. (e. g., 32.16))

1. $3,59,666.66

2. $4,10,066.66

Explanation:

1. The computation of value of firm is shown below:-

As the Earning before interest and tax given remains the same, this impact that there is no growth rate in the earnings to consider.

= Earning before interest and tax × (1 - Tax) ÷ Cost of equity

= $83,000 × (1 - 0.35) ÷ (0.15)

= $53,950 ÷ 0.15

= $3,59,666.66

2. The computation of value of levered firm is shown below:-

Value of unlevered firm + Debt × Tax rate

= 3,59,666.66 + ($144,000 × 35%)

= $4,10,066.66

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whole quiz

1. the sum of all activities involved in getting high-quality products into the marketplace

2.operations

3. the principle of looking at the supply chain as a whole in order to improve the overall flow through the system.

4. produced; performed

5. activities producing tangible products, such as radios, newspapers, buses, and textbooks.

6. activities producing intangible and tangible products, such as entertainment, transportation, and education.

7.   customer focus

8. analyzing a competitor's products to identify desirable improvements

9. the systematic direction and control of the processes that transform resources into finished projects that create value for and provide benefits to consumers.

10. operation management.

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