The Montana Hills Co. has expected earnings before interest and taxes of $8,100, an unlevered cost of capital of 11%, and debt with both a book and face value of $12,000. The debt has an annual 8% coupon. The tax rate is 34%. What is the value of the firm?

$52,680

Explanation:

Calculation for the value of the firm

First step is to find the VU

VU= [$8,100 ×(1 - .34) ] ÷.11

VU=($8,100×0.66)÷.11

VU=$5,346÷11

VU = $48,600

Now let find the value of the firm

VL= $48,600 + (.34 ×$12,000)

VL=$48,600+$4,080

VL= $52,680

Therefore the value of the firm will be $52,680

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