## Related questions with answers

Question

**M&M and Taxes** $\color{#c34632}\text{[Lo2]}$ In previous Problem, what is the cost of equity
after recapitalization? What is the WACC? What are the implications for the firm's capital structure
decision?

Solution

VerifiedAnswered 1 year ago

Answered 1 year ago

Step 1

1 of 4First, we have to find out the actual value of the firm which we denote with $AV$, where the earnings before interest and taxes $EI$ is $\$97,000$, tax rate $TR$ is $24\%$ and the cost of equity $CE$ is $13\%$

$\begin{align*} AV&=\frac{EI \times (1-TR)}{CE}\\[12pt] &=\frac{97,000 \times (1-24\%)}{13\%}\\[12pt] &=\frac{97,000 \times (1-0.24)}{0.13}\\[12pt] &=\frac{97,000 \times 0.76}{0.13}\\[12pt] &=\frac{73,720}{0.13}\\[12pt] &=567,076.9231 \end{align*}$

Therefore, the actual value of the firm is $\boxed{\$567,076.9231}$

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