An Unlevered Firm Has a Cost of Capital of 13

question 30

Multiple Choice

An unlevered firm has a cost of capital of 13.6 percent and earnings before interest and taxes of $138,000.A levered firm with the same operations and assets has both a book value and a face value of debt of $520,000 with an annual coupon of 7 percent.The applicable tax rate is 21 percent.What is the value of the levered firm?

• A)$996,421
• B)$907,679
• C)$1,184,929
• D)$910,818
• E)$1,191,506

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Definitions:

Accounts Payable Period

The average number of days it takes for a business to pay its invoices from suppliers.

Accounts Receivable

The money owed to a business by its clients or customers for goods or services provided on credit.

Compensating Balance

A minimum balance that must be maintained in a bank account, often required by banks as a condition for loans or to waive service charges.