The Coffee Shop Has Expected Earnings Before Interest and Taxes

question 353

Multiple Choice

The Coffee Shop has expected earnings before interest and taxes of $14,600, an unlevered cost of capital of 12%, and debt with both a book and face value of $18,000. The debt has an annual 8.25% coupon. The tax rate is 35%. What is the value of the firm?

• A) $81,640
• B) $85,383
• C) $87,778
• D) $90,114
• E) $92,309

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Definitions:

Potentially Efficient

A condition indicating that a system or process could achieve maximum productivity with minimum waste or expense, but hasn't yet done so.

Consumer Surplus

The gap between the amount customers are prepared to spend on a product or service and the amount they end up paying.

Producer Surplus

The difference between the amount producers are willing to accept for a good or service versus what they actually receive.

P = MC

An economic principle stating that the optimal level of output occurs when the price (P) equals marginal cost (MC), guiding firms in perfect competition on production decisions.