An Unlevered Firm Has an EBIT = $250,000, After-Tax Net

question 104

Multiple Choice

An unlevered firm has an EBIT = $250,000, after-tax net income = $165,000, and a cost of capital of 12%. A levered firm with the same assets and operations has $1.25 million in face value debt paying an 8% annual coupon; the debt sells for par value in the marketplace. What is the value of the levered firm? The tax rate is 34%.

• A) $1,250,000
• B) $1,375,000
• C) $1,666,667
• D) $1,800,000
• E) $2,625,000

---

Definitions:

Drawing Account

An account used to record withdrawals of business assets by the owner for personal use, reducing the capital account.

Salary Expense

The cost incurred by a company for the payment of regular salaries to its employees.

Accrued Salaries

Salaries that have been incurred but not yet paid by the end of a financial period, representing a liability for the business.

Closing

The process of finalizing accounting records at the end of an accounting period, including updating accounts and preparing financial statements.