An unlevered firm has a cost of capital of 17.5 percent and earnings before interest and taxes of $327,500

Exports Unlimited is an unlevered firm with an aftertax net income of $52,300. The unlevered cost of capital is 14.1 percent and the tax rate is 36 percent. What is the value of this firm?    A.  $270,867 B.  $339,007 C.  $370,922 D.  $378,444 E.  $447,489 VU = $52,300/0.141 = $370,922

70.

An unlevered firm has a cost of capital of 17.5 percent and earnings before interest and taxes of $327,500. A levered firm with the same operations and assets has both a book value and a face value of debt of $650,000 with a 7.5 percent annual coupon. The applicable tax rate is 38 percent. What is the value of the levered firm?    A.  $1,397,212 B.  $1,398,256 C.  $1,402,509 D.  $1,407,286 E.  $1,414,414 VU = [$327,500 × (1 - 0.38)]/0.175 = $1,160,285.71 VL = $1,160,285.71 + 0.38($650k) = $1,407,286

71.

Down Bedding has an unlevered cost of capital of 14 percent, a cost of debt of 7.8 percent, and a tax rate of 32 percent. What is the target debt-equity ratio if the targeted cost of equity is 15.51 percent?    A.  .24 B.  .29 C.  .36 D.  .52 E.  .71 RE = 0.1551 = 0.14 + (0.14 - 0.078) × D/E × (1 - 0.32); D/E = 0.358