Dupuis can borrow at 1125 percent Dupuis currently has no de

Dupuis can borrow at 11.25 percent. Dupuis currently has no debt, and the cost of equity is 13.5 percent. The current value of the firm is $667,000. The corporate tax rate is 32 percent.

What will the value be if Dupuis borrows $224,000 and uses the proceeds to repurchase shares?

Solution

value of levered firm = value of unlevered firm + (debt * tax rate)

=> $667,000 + ($224,000 * 32%)

=>$738,680.

the value of DUpuis after borrowing = $738,680.