L.A. Clothing has expected earnings before interest and taxes of $48,900, an unlevered cost of capital of 14.5 percent,

L.A. Clothing has expected earnings before interest and taxes of $48,900, an unlevered cost of capital of 14.5 percent, and a tax rate of 34 percent. The company also has $8,000 of debt that carries a 7 percent coupon. The debt is selling at par value. What is the value of this firm?    A.  $222,579.31 B.  $223,333.33 C.  $224,108.16 D.  $225,299.31 E.  $225,476.91 VU = [$48,900 × (1 - 0.34)]/0.145 = $222,579.31 VL = $222,579.31 + 0.34 ($8,000) = $225,299.31

67.

Hanover Tech is currently an all equity firm that has 320,000 shares of stock outstanding with a market price of $19 a share. The current cost of equity is 15.4 percent and the tax rate is 34 percent. The firm is considering adding $1.2 million of debt with a coupon rate of 8 percent to its capital structure. The debt will be sold at par value. What is the levered value of the equity?    A.  $5.209 million B.  $5.288 million C.  $5.312 million D.  $6.512 million E.  $6.708 million VL = (320,000 × $19) + (0.34 × $1.2m) = $6.488m VE = $6.488m - $1.2m = $5.288m

68.

Bright Morning Foods has expected earnings before interest and taxes of $48,600, an unlevered cost of capital of 13.2 percent, and debt with both a book and face value of $25,000. The debt has an 8.5 percent coupon. The tax rate is 34 percent. What is the value of the firm?    A.  $245,500 B.  $247,600 C.  $251,500 D.  $264,800 E.  $271,300 VU = [$48,600 × (1 - 0.34)]/0.132 = $243,000 VL = $243,000 + (0.34 × $25,000) = $251,500