Referring to table below, calculate the market value of firm L (without a corporate income tax) if
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Referring to table below, calculate the market value of firm L (without a corporate income tax) if the equity amount in its capital structure decreases to $10,000 and the debt amount increases to $10,000. At this capital structure, the cost of equity is 21 percent. Round your answer to the nearest dollar.
| Firm U | Firm L | |||||||
| Net operating income (EBIT) | $ | 3,000 | $ | 3,000 | ||||
| Less: Interest payments to debt holders, I | - | 675 | ||||||
| Income available to stockholders (dividends), D | $ | 3,000 | $ | 2,325 | ||||
| Total income available to security holders, I + D | $ | 3,000 | $ | 3,000 | ||||
| Required rate of return on debt, kd | - | 9 | % | |||||
| Market value of debt, B = I/kd | - | $ | 7,500 | |||||
| Required rate of return on equity,ke | 15 | % | 18.6 | % | ||||
| Market value of equity, E = D/ke | $ | 20,000 | $ | 12,500 | ||||
| Market value of firm, E + B | $ | 20,000 | $ | 20,000 | ||||
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