Question
A company expects its earnings before interest and taxes to be $111,000 every year in perpetuity. The company has an opportunity to borrow money (e.g.,
A company expects its earnings before interest and taxes to be $111,000 every year in perpetuity. The company has an opportunity to borrow money (e.g., bank loan or bonds) at 6 percent annual cost of debt. Right now, however, the company does not have any debt, and its annual cost of equity equals 13 percent.
a. Assume that the company faces a tax rate of 25 percent. Calculate the current market value of this company. (Do not round your intermediate calculations. Only round your final answer to 2 decimal places, e.g., 32.16.)
b. Recalculate the market value of this company if it takes a loan of $235,000 and uses the borrowed money to buy back its own stock shares. (Do not round your intermediate calculations. Only round your final answer to 2 decimal places, e.g., 32.16.)
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