Bruce & Co. expects its EBIT to be $100,000 every year forever. The firm can borrow at 10 percent.

Bruce & Co. expects its EBIT to be $100,000 every year forever. The firm can borrow at 10 percent. Bruce currently has no debt, and its cost of equity is 20 percent. The tax rate is 34 percent. What will the value of Bruce & Co. be if the firm borrows $54,000 and uses the loan proceeds to repurchase shares?    A.  $280,130 B.  $346,600 C.  $348,360 D.  $378,900 E.  $381,520 VU = $100,000 (1 - 0.34)/0.20; V = $330,000 VL = $330,000 + 0.34($54,000) = $348,360

93.

Bruce & Co. expects its EBIT to be $100,000 every year forever. The firm can borrow at 11 percent. Bruce currently has no debt, and its cost of equity is 18 percent. The tax rate is 31 percent. Bruce will borrow $61,000 and use the proceeds to repurchase shares. What will the WACC be after recapitalization?    A.  16.30 percent B.  16.87 percent C.  17.15 percent D.  18.29 percent E.  18.86 percent VU = $100,000(1 - 0.31)/0.18 = $383,333.33 VL = $383,333.33 + 0.31($61,000) = $402,243.33 RE = 0.18 + (0.18 - 0.11)($61,000/$402,243.33 - $61,000)(1 - 0.31) = 0.1886 WACC = 0.1886($402,243.33 - $61,000)/$402,243.33 + 0.11($61,000/$402,243.33) (1 - 0.31) = 17.15 percent

94.

New Schools, Inc. expects an EBIT of $7,000 every year forever. The firm currently has no debt, and its cost of equity is 15 percent. The firm can borrow at 8 percent and the corporate tax rate is 34 percent. What will the value of the firm be if it converts to 50 percent debt?    A.  $31,796.47 B.  $36,036.00 C.  $37,407.16 D.  $37,552.08 E.  $38,119.30 VU = $7,000 (1 - 0.34)/0.15 = $30,800.00 VL = $30,800.00 + 0.34 (0.50) ($30,800.00) = $36,036.00 Note: When levered, the value of debt is equal to one-half of the unlevered value of the firm.