An Unlevered Firm Has a Cost of Capital of 14

question 18

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