Corporate Finance - Reading 30 - EOC 17

Hello, My first post here… Please don’t mind the english… I’m working on it right now :slight_smile: I’m a bit confused on this EOC. I do not get why V(unlevered) equals EBIT/Wacc. In a world with taxes, this should be EBIT(1-t)/Wacc, right? Just as the example below p 106 in the book. Or am I completely missing the picture… Grtz, Matt

if it’s a world with taxes, then wouldn’t we want to leave taxes in there, hence just EBIT? Don’t have my book in front of me but value unlevered, for example, would be 400,000 EBIT/ 0.10 wacc = $4mm. Value levered= value unlevered $4mm + 30% tax rate*($1mm debt amount) = $4.30mm So the value levered up is greater because of the tax shield benefits of debt. Does that help?

Not really. I do not get why you don’t have to pay taxes. V(unleverd) = 400,000 EBIT * (1-0.3)/ 0.10 wacc. Which gives 2,8 million value. As I see it, it is not because you are not levered that you don’t need to pay taxes. And CF to shareholders would be after taxes. after that I would adjust for 1 mm debt amount * 30% tax rate = 0.30mm to V(levered) of 3,1 million. Or not?

Not. I need to re-read that to see exactly why, but the “levered” and “unlevered” has to do with including the debt*taxes or not. The EBIT or EBIT*(1-T) thing I don’t think is that important here- but i gotta find a better reason. Why would you value the firm based on EBIT*(1-T) otherwise known as Net Income? You could, but in this case they are using EBIT. In your example you get a higher levered value it’s just less cuz you used NI instead of EBIT.

STOP… you have it right. its listed in the CFA errata saying they forgot to account for taxes

Stupid question than. Nice way to start on the forum. I got a look to the errate before I posted this, but looked right over it. I’ve been studiying quite a lot today. (Just can’t get to memorize al those formulas) I think it is beter to call it a day! Thanks a lot!