Lindbergh Company has the following date related to its capi

Lindbergh Company has the following date related to its capital structure: CASE A CASE B EBIT (in perpetuity): $175,000 EBIT (in perpetuity): $175,000 Rate on debt: 4.0 % Rate on debt: 4.0 % Cost of Equity: 13.0% Cost of Equity: 13.0% Tax Rate: 35.0% Tax Rate: 35.0% Debt: 0 Debt: Borrow $135,000 to buy share Will have debt in perpetuity What is the value of unlevered firm (Case A) and the levered firm (Case B) Vu = 875,000; Vl = 922,250 Vu = 875,000; Vl = 880,400 Vu = 1,346,153.85; Vl = 922,250

Solution

Select - Option - A ............. Vu = 875,000 and Vl = 922,250

Value of Unlevered firm = EBIT ( 1 - Tax rate ) / Ke

= 175000 * ( 1 - 0.35) / 0.13 = 875,000

Value of Levered firm = Vu + debt * tax rate = 875,000 + (135000 * 0.35)

= 922,250