Lindbergh Company has the following date related to its capital structure:
| CASE A | | CASE B |
| EBIT (in perpetuity): | $205,000 | | EBIT (in perpetuity): | $205,000 |
| Rate on debt: | 5.0 % | | Rate on debt: | 5.0 % |
| Cost of Equity: | 12.0% | | Cost of Equity: | 12.0% |
| Tax Rate: | 35.0% | | Tax Rate: | 35.0% |
| Debt: | 0 | | Debt: | Borrow $135,000 to buy share |
| | | | Will have debt in perpetuity |
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 |
Flag this QuestionQuestion 2
Prescott Inc. has the following data regarding its financial structure:
| Market value of outstanding debt: | $2,500,000 |
| Value of firm if financed with all equity: | $14,450,000 |
| Number of shares outstanding: | 250,000 |
| Current price per share: | $38.00 |
| Tax rate: | 35 % |
What is the decrease in firm value due to expected bankruptcy costs?
Solution: Lindbergh Company has the following date related to its capital *