what is the value of the firm? What will the value be if Bruce borrows $60,000 and uses the proceeds to repurchase shares?

Question

579 viewsNovember 30, 2016

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Darshita 6.14K November 30, 2016 0 Comments

Bruce & Co. expects its EBIT to be $95,000 every year forever. The firm can borrow at 11 percent. Bruce currently has no debt, and its cost of equity is 22 percent. If the tax rate is 35 percent, what is the value of the firm? What will the value be if Bruce borrows $60,000 and uses the proceeds to repurchase shares?

score 0 · Answer 1 · 2016-11-30T07:46:47+00:00

V = EBIT(1 – tC)/RU

V = $95,000(1 – .35)/.22

V = $280,681.82

V = VU + tCD

V = $280,681.82 + .35($60,000)

V = $301,681.82

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