Stevenson's Bakery is an all-equity firm that has projected perpetual earnings before interest and taxes of $138,000 a year.The cost of equity is 13.7 percent and the tax rate is 32 percent.The firm can borrow money at 6.75 percent.Currently,the firm is considering converting to a debt-equity ratio of 0.45.What is the firm's levered value?
A)$527,613
B)$689,919
C)$752,987
D)$829,507
E)$903,682

Question

Quizplus · Accepted Answer

V_U = [$138,000 × (1 - 0.32)]/0.137 = $684,963.50V_L = $684,963.50 + [0.32 × (0.45/1.45) × $684,963.50] = $752,987

Stevenson's Bakery Is an All-Equity Firm That Has Projected Perpetual