Use the following information to answer questions 12 to 15

Pharma has a projected annual EBIT of $300,000 which is expected to grow at a stable rate of 4%. The firm is currently debt free and is considering using $250,000 in debt. At that level of debtPharma will be rated BB. The current cost of equity is 13% and the bankruptcy cost represents 5% of the current value of the firm. The tax rate is 40%. What would be the current value of Pharma?

Bond Rating Probability of Bankruptcy

B+ 17.20%

BB 12.50%

AA 6.00%

Select one:

a.42,560,000

b.$1,255,000

c.$1,575,000

d.$2,080,000