Answer: $530000
Explanation:
Debt $200000.
Equity $400000
rd=7%.
rd for equity =12%
Taxrate= 40%
Earning rate for equity= 4%
Firm L has a total of $200000+ $400000= $600000
A similar firm with no debt should have a smaller value.
The calculation is as follows.
VTotal= Vu + Vts
Make Vu the subject of the formula
So,
Vu= VTotal - Vts
= Debt + Equity(S) - Vts
Firstly, we need to calculate Vts
Value tax shelter (Vts)
=rdTD(rsU-G)
= 0.07(0.40)(200000)/(0.12-0.04)
=5600/0.08
= $80,000
Therefore,
Vu= $200000 + $400000- $70000
Vu= $600000 - $70000
Vu= $ 530000
In conclusion
The value of Firm L if it has no debt is $530000
Answer:
$530,000
Explanation:
Debt: $200,000
rd: 7%
T: 40%
Equity: $400,000
rsU: 12%
g: 4%
Firm L has a total value of $200,000 + $400,000 = $600,000. A similar firm with no debt should therefore have a smaller value.
VTotal= VU+ VTS
Therefore VU= VTotal−VTS= D + S −VTS.
Value tax shelter = VTS= rdTD/(rsU−g)
= 0.07(0.40)($200,000)/(0.12 −0.04)
=$5,600/0.08
= $70,000
VU= $400,000 + $200,000 −$70,000
$600,000-$70,000 = $530,000
VU= $530,000
The value of Firm L if it had no debt is $530,000
