UNLEV Has an Expected Perpetual EBIT = $4,000

Multiple Choice

UNLEV has an expected perpetual EBIT = $4,000. The unlevered cost of capital = 15% and there are 20,000 shares of stock outstanding. The firm is considering issuing $8,800 in new par bonds to add financial leverage to the firm. The proceeds of the debt issue will be used to repurchase equity. The cost of debt = 10% and the tax rate = 34%. There are no flotation costs.

Including the effect of taxes, what is the value of UNLEV before the restructuring?

A) $15,930
B) $17,600
C) $18,519
D) $26,667
E) $30,000