Estimate the unlevered value of firm

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Reference no: EM13933341

Pennsylvania steel, one of the largest steel companies in the united States, is considering whether it has any excess debt capacity. The company has $527 million in market value of debt outstanding and $1.76 billion of market value o equity. The company has EBIT of $131 Million and faces a corporate tax rate of 36%. The company's bonds are rated BBB, and the cost of debt is 8%. At this rating the company has probability of default of 2.30%, and the cost of bankruptcy is estimated to be 30% of firm value.

A. Estimate the unlevered value of firm.

B. Estimate the levered value of the firm using the APV approach, at a debt ratio of 50%. at that debt ratio, the firm's bond rating will be CCC, and the probability of default will increase to 30%.

Reference no: EM13933341

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