| Jet Corporation expects an EBIT of $18,100 every year forever. The company currently has no debt, and its cost of equity is 16 percent. The corporate tax rate is 35 percent. |
| a. | What is the current value of the company? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.) |
| Current value | $ |
| b-1 | Suppose the company can borrow at 11 percent. What will the value of the firm be if the company takes on debt equal to 40 percent of its unlevered value? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.) |
| Value of the firm | $ |
| b-2 | Suppose the company can borrow at 11 percent. What will the value of the firm be if the company takes on debt equal to 100 percent of its unlevered value? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.) |
| Value of the firm | $ |
| c-1 | What will the value of the firm be if the company takes on debt equal to 40 percent of its levered value? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.) |
| Value of the firm | $ |
| c-2 | What will the value of the firm be if the company takes on debt equal to 100 percent of its levered value? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.) |
A
V = EBIT(1 – tC)/RU
V = $18100(1 – .35)/.16
V = $73531.25
B1
With debt, we simply need to use the equation for the value of a levered firm. With 40 percent debt, one-half of the firm value is debt, so the value of the levered firm is:
V = VU + tCD
V = $73531.25 + .35($73531.25/0.4)
V = $137871.1
B2
And with 100 percent debt, the value of the firm is:
V = VU + tCD
V = $73531.25 + .35($73531.25)
V = $99267.19
C1
VL=VU+tCB
With debt being 40 percent of the value of the levered firm,Dmust equal (.40)VL, so
:VL=VU+T[(.40)VL]VL
= $73531.25+ .35(.40)(VL)
VL= $85501.45
If the debt is 100 percent of the levered value,Dmust equalVL, so:
VL=VU+T[(1.0)VL]
VL= $73531.25+ .35(1.0)(VL)
VL= $113125
