Question

Tool Manufacturing has an expected EBIT of $63,000 in perpetuity and a tax rate of 35 percent. The company has $185,000 in outstanding debt at an interest rate of 6.6 percent, and its unlevered cost of capital is 14 percent.

What is the value of the company according to MM Proposition I with taxes?

Answer 1

The value of the company according to MM Proposition I with taxes is $357,250.

Step-by-step explanation:

To calculate the value of the company according to MM Proposition I with taxes we have to calculate first the VU = [EBIT(1 - tC)] / RU

= [($63,000)(1 - 0.35)] / 0.14

= $40,950 / 0.14 = $292,500

After having calculated the VU we can proceed to calcuate the value of the company according to MM Proposition I with taxes

We use the following formula:

VL = VU + [tC * Debt]

= $292,500 + [0.35 * $185,000]

= $292,500 + $64,750 = $357,250. Value of the company

Answer 2

VL= $357,250

Step-by-step explanation:

VU= EBIT(1 –tC)/RU

VU= ($63,000)(1–.35)/.14

VU= $63,000(0.65)/.14

VU=$63,000(4.6428)

VU= $292,500

Now we can find the value of the levered firm as:

VL = VU + tCD

VL= $292,500 + .35($185,000)

VL=$292,500+$64,750

VL= $357,250

Therefore the value of the company according to MM Proposition I with taxes $357,250