The A. J. Croft Company (AJC) currently has $200,000 market value (and book value) of perpetual debt outstanding carrying a coupon rate of 6 percent. Its earnings before interest and taxes (EBIT) are $100,000,

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Darshita 6.14K January 1, 2017 0 Comments

The A. J. Croft Company (AJC) currently has $200,000 market value (and book value) of perpetual debt outstanding carrying a coupon rate of 6 percent. Its earnings before interest and taxes (EBIT) are $100,000, and it is a zero-growth company. AJC”s current cost of equity is 10 percent, and its tax rate is 40 percent. The firm has 10,000 shares of common stock outstanding.

. What is AJC”s current total market value?

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score 0 · Answer 1 · 2017-01-01T08:53:03+00:00

Market value = value of debt + value of common stock

200,000 + [EBIT – I](1-T) / .11

= 200,000 + [($100,000 – ($200,000 × 6%)) × (1-0.4) ] ÷ 11%

= $200,000 + [($100,000 – ($12,000)) × (0.6) ] ÷ 11%

= $200,000 + [$88,000 × 0.6] ÷ 11%

= $200,000 + ($52,800 ÷ 11%)

= $200,000 + $480,000

= $680,000

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