Question

The Winter Wear Company has expected earnings before interest and taxes of $3,800, an unlevered cost of capital of 15.4 percent and a tax rate of 35 percent. The company also has $2,600 of debt with a coupon rate of 5.7 percent. The debt is selling at par value. What is the value of this firm

Answer 1

Answer:

The value of the firm is $16,949

Explanation:

Value of the firm is the firm's economic value at a particular time. Winter Wear Company's value will be calculated by:

= $\frac{EBIT(1-tax rate)}{Unlevered Cost of Capital}$ + (Tax rate * Debt) =

Here given are,

EBIT = $3,800

Tax Rate = 35%

Unlevered Cost of Capital = 15.4%

Debt = $2,600

= $\frac{3,800(0.65)}{0.154}$ + (0.35 x $2,600)

= $16,039 + $ 910

= $16,949