Forbidden Fruit Extracts Expects Its Earnings Before Interest and Taxes

question 73

Multiple Choice

Forbidden Fruit Extracts expects its earnings before interest and taxes to be $325,000 a year forever.Currently,the firm has no debt.The cost of equity is 16.3 percent and the tax rate is 35 percent.The company is in the process of issuing $2 million of bonds at par that carry a 6.5 percent annual coupon.What is the unlevered value of the firm?

• A)$371,429
• B)$431,971
• C)$747,485
• D)$969,325
• E)$1,296,012

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Definitions:

Manufacturing Overhead

All indirect costs associated with the manufacturing process, excluding direct materials and direct labor costs.

Administrative Costs

Expenses related to the general operations of a business that are not directly tied to the production of goods or services.

Direct Material

Raw materials that can be directly traced to the production of a specific product.

Product Costs

Costs that are considered to be directly associated with the production of goods or services, including direct labor, direct materials, and manufacturing overhead.