Lindbergh Company has the following date related to its capital structure:
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CASE A
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CASE B
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EBIT (in perpetuity):
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$205,000
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EBIT (in perpetuity):
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$205,000
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Rate on debt:
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5.0 %
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Rate on debt:
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5.0 %
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Cost of Equity:
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12.0%
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Cost of Equity:
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12.0%
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Tax Rate:
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35.0%
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Tax Rate:
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35.0%
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Debt:
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0
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Debt:
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Borrow $135,000 to buy share
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Will have debt in perpetuity
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What is the value of unlevered firm (Case A) and the levered firm (Case B)
A. Vu = 1,110,416.67; Vl = 1,157,666.67
B. Vu = 1,010,416.67; Vl = 1,117,166.67
C. Vu = 1,708,333.33; Vl = 1,157,666.67
Prescott Inc. has the following data regarding its financial structure:
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Market value of outstanding debt:
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$2,500,000
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Value of firm if financed with all equity:
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$14,450,000
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Number of shares outstanding:
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250,000
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Current price per share:
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$38.00
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Tax rate:
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35 %
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What is the decrease in firm value due to expected bankruptcy costs?
A. $3,325,000
B. $4,950,000
C. $875,000