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Tool Manufacturing has an expected EBIT of $82,000 in perpetuity and a tax rate of 24 percent. The company has $143,500 in outstanding debt at an interest rate of 6.3 percent and its unlevered cost of capital is 13 percentWhat is the value of the firm according to M&M Proposition I with taxes?

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Answer:

The value of the firm according to M&M Proposition I with taxes is $513,824.62

Explanation:

Value of firm = [EBIT x (1-Tax) / Equity Cost] + [Debt x Tax rate]

Value of firm = 82000 x (1-24%) / 13% + 143500 x 24%

Value of firm = 62320 / 0.13 + 143500 x 0.24

Value of firm = 479,384.62 + 34,440‬

Value of firm = $513,824.62‬

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