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Firm Value - Janetta Corp

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Firm Value
Janetta Corp. has an EBIT rate of $750,000 per year that is expected to continue in perpetuity. The unlevered cost of equity for the company is 15%, and the corporate tax rate is 35%. The company also has a perpetual bond issue outstanding with a market value of $1.5 million.
a. What is the value of the company?
b. The CFO of he company informs the company president that the value of the company is $3.2 million. Is the CFO correct?

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Solution Preview

a. What is the value of the company?

The value of a levered firm = Value unlevered + value of tax shield on debt
Value unlevered = EBIT X (1-tax ...

Solution Summary

The solution explains how to calculate the value of a firm.

$2.19