What is the value of unlevered company

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3) The Textile Company (TC) is a company with an EBIT of $750,000 in perpetuity. The beta of the firm (equity beta) is 1.3, the risk-free rate is 1.8%, and the market risk premium is 4.0%. The company's tax rate is 38%. The firm currently has no debt.

a) What is the value of this unlevered company?

b) Now suppose that TC is about to issue bonds to buy back stock. The bonds have a face value of $1000 and the yield to maturity is equal to the annual coupon rate. Assume that the bond is in the form of a perpetuity. If the firm wants to obtain a debt-to-equity ratio of 1.5, how many bonds will the firm need to issue? How much will the recapitalized firm be worth?

Reference no: EM13892763

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