massive dynamics has an ebit of $2 million per year forecast in perpetuity. its cost of equity is 16% and its tax rate is 28%. if massive dynamics borrows $5 million, what will be the value of the firm?

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28-10-2022
Business

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massive dynamics has an ebit of $2 million per year forecast in perpetuity. its cost of equity is 16% and its tax rate is 28%. if massive dynamics borrows $5 million, what will be the value of the firm?

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contexto1005 contexto1005 · Answer 1 · 2022-11-01T19:09:09+01:00

If massive dynamics borrows $5 million, then the value of the firm is 10.40 million.

Value of all equity Firm =EBIT(1-Tax Rate)/Cost of Equity =2000000(1-28%)/16%=9000000

Value of the firm =Value of all equity firm +Debt ×Tax Rate =9000000+5000000 ×28% =10,400,000 or 10.40 million

An investment company that uses its own money or capital from other investors for its expansion and startup operations is referred to as an equity firm or private equity firm. Typically, equity firms do not have a public listing and their shares are not traded on the stock exchange. The market value of a company is determined by adding the market values of all outstanding debt, common shares, and preferred shares. Comparing the market value of capital (equity) to the adjusted value of capital yields this measurement (equity).

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