Calculate the market value of Lotle Group, a firm with total assets of $80 million and $30 million of perpetual debt in its capital structure. The firm's cost of equity is 14% and the cost of debt is 9%. Lotle expects annual, perpetual net operating income (EBIT) of $9 million and a marginal tax rate of 40%.

Question

Clayton Robbins

Business

20 October, 17:46

Calculate the market value of Lotle Group, a firm with total assets of $80 million and $30 million of perpetual debt in its capital structure. The firm's cost of equity is 14% and the cost of debt is 9%. Lotle expects annual, perpetual net operating income (EBIT) of $9 million and a marginal tax rate of 40%.

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Andrade · Answer 1

The market value of Lotle Group is $ 83.53.

Explanation:

The market value of Lotle Group can be calculated by dividing the perpetual net operating income (EBIT) with company WAAC. Detail calculation is given below.

MW = EBIT/WAAC = $ 9/10.775% = $ 83.53

WAAC Calculation

WAAC = 14% * (50/80) % + 9% (0.60) (30/80)

WAAC = 8.75% + 2.025% = 10.775%