Calculate the market value of a firm with total assets of $60 million and a net worth of $35 million. The firm's cost of equity is 15%, and the cost of perpetual debt is 8%. The firm has a perpetual net operating income (EBIT) of $4.5 million and a marginal tax rate of 35%.
A) $41.67 million
B) $30.00 million
C) $35.83 million
D) $30.83 million

Question

Quizplus · Accepted Answer

First, we need to find the market value of the firm's debt. We can use the formula for the cost of debt to find this:

Cost of debt = Perpetual interest / Market value of debt

0.08 = $60,000,000 - $35,000,000 - Market value of debt / Market value of debt

Market value of debt = $312,500,000

Next, we can use the formula for weighted average cost of capital (WACC) to find the market value of the firm:

WACC = (Cost of equity x Equity proportion) + (Cost of debt x Debt proportion) x (1 - Tax rate)

0.15 = (35,000,000 / Market value of firm) + (0.08 x 312,500,000 / Market value of firm) x (1 - 0.35)

Solving for Market value of firm, we get:

Market value of firm = $35,833,333

Therefore, the best choice is C.

Calculate the Market Value of a Firm with Total Assets