An Unlevered fiRm Has a Cost of Capital of 14

question 76

Multiple Choice

An unlevered firm has a cost of capital of 14% and earnings before interest and taxes of €150,000.A levered firm with the same operations and assets has both a book value and a face value of debt of €700,000 with a 7% annual
Coupon.The applicable tax rate is 35%.What is the value of the levered firm?

• A)€696,429
• B)€907,679
• C)€941,429
• D)€1,184,929
• E)€1,396,429

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Definitions:

Quiet Period

A time frame in which companies are restricted from making certain announcements to prevent affecting their stock price before a securities offering.

Lockup Agreement

A contract stating that shareholders of a newly issued stock agree not to sell their shares for a certain period following an initial public offering.

Initial Public Offering (IPO)

The first sale of stock by a company to the public, marking a transition from a private to a publicly traded company.

Share Repurchase Program

A plan initiated by a company to buy back its own shares from the marketplace, which can signal confidence in the business and often leads to an increase in the share price.