Asked by Jennifer Moore on Jun 19, 2024
Verified
A firm has a tax rate of 35%, an unlevered rate of return of 14%, total debt of $1,000, and an EBIT of $300.00. What is the unlevered value of the firm?
A) $27
B) $393
C) $1,027
D) $1,393
E) $2,143
Unlevered Value
Unlevered value is the value of a company or investment assuming it has no debt financing, focusing solely on its equity value.
Tax Rate
The proportion of financial income that is taxed from either a person or a corporate body.
Unlevered Rate
A financial metric that measures the return on investment without considering the impact of financial leverage.
- Evaluate the effects of assorted capital structures on the valuation of a company and the implications of financial leverage.
Verified Answer
MH
Mikayla HintonJun 20, 2024
Final Answer :
D
Explanation :
The unlevered value of the firm can be calculated using the formula: Unlevered Value = EBIT(1 - Tax Rate) / Unlevered Rate of Return. Plugging in the given values: Unlevered Value = $300(1 - 0.35) / 0.14 = $195 / 0.14 = $1,392.86, which rounds to $1,393.
Learning Objectives
- Evaluate the effects of assorted capital structures on the valuation of a company and the implications of financial leverage.