Gary Electronics has an EBIT of $200,000, zero growth and its tax rate is 40%. Gary has $600,000 debt outstanding (8% before-tax cost of debt), and a similar company with no debt has a cost of equity of 10%.

a) What is the unlevered firm value if Gary does not have debt?

b) Using the compressed adjusted present value model, what is the value of Gary’s tax shield?

c) Using the compressed adjusted present value model, what is Gary’s value of operation?

Answer rating: 100% (QA)

a The unlevered firm value represents the value of a company if it does not have any debt It can be ... View the full answer