Kline Construction is an all-equity firm that has projected perpetual earnings before interest and taxes of $879 000.The current cost of equity is 18.3 per cent and the tax rate is 34 per cent.The company is in the process of issuing $6.2 million of 8.5 per cent annual coupon bonds at par.What is the levered value of the firm?
A)$5 278 164
B)$6 422 225
C)$7 385 695
D)$6 713 185
E)$5 541 085

Question

Quizplus · Accepted Answer

The levered value of the firm is the sum of the value of the equity and the value of the debt. The value of the equity is the present value of the perpetual earnings before interest and taxes divided by the cost of equity. The value of the debt is the present value of the perpetual interest payments divided by the cost of debt. The cost of debt is the yield to maturity of the bonds.The levered value of the firm is:Value of equity = $879,000 / 0.183 = $4,803,279Value of debt = $6,200,000 * 0.085 / 0.085 = $6,200,000Levered value of the firm = $4,803,279 + $6,200,000 = $11,003,279

Kline Construction Is an All-Equity Firm That Has Projected Perpetual