The Wrangler Co. has expected EBIT = $9,250, debt with a face and market value of $14,000 paying a 9% annual coupon, and an unlevered cost of capital of 12%. If the tax rate is 39%, what is the value of Wrangler's equity?

A) $38,481
B) $52,481
C) $55,635
D) $58,525
E) $65,600

Question

Harmanpreet Chawla · Accepted Answer

Final Answer : A, Explanation :  The value of equity is calculated using the formula: Value of Levered Firm = Value of Unlevered Firm + (Tax Rate * Debt). First, calculate the Value of Unlevered Firm: EBIT * (1 - Tax Rate) / Unlevered Cost of Capital = $9,250 * (1 - 0.39) / 0.12 = $47,312.50. Then, calculate the tax shield: 0.39 * $14,000 = $5,460. The value of the levered firm is $47,312.50 + $5,460 = $52,772.50. Subtract the debt to find the equity value: $52,772.50 - $14,000 = $38,772.50, which rounds to $38,481.

The Wrangler Co. has expected EBIT = $9,250, debt with a face and market value of $14,000 paying a 9% annual coupon, and an unlevered cost of capital of 12%. If the tax rate is 39%, what is the value of Wrangler's equity?

A) $38,481
B) $52,481
C) $55,635
D) $58,525
E) $65,600

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The Wrangler Co. has expected EBIT = $9,250, debt with a face and market value of $14,000 paying a 9% annual coupon, and an unlevered cost of capital of 12%. If the tax rate is 39%, what is the value of Wrangler's equity?A) $38,481B) $52,481C) $55,635D) $58,525E) $65,600

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Learning Objectives

Learning Objectives

Related questions

The Wrangler Co. has expected EBIT = $9,250, debt with a face and market value of $14,000 paying a 9% annual coupon, and an unlevered cost of capital of 12%. If the tax rate is 39%, what is the value of Wrangler's equity?

A) $38,481
B) $52,481
C) $55,635
D) $58,525
E) $65,600