(EBIT) are €10 million and Lassen expects this to remain constant for the foreseeable future.
Based on market values, the company’s debt to equity ratio is 0.25 and its debt is €20 million.
The current corporate tax rate paid by HCC is 20%.
Lassen decides he first wants to find the company’s weighted average cost of capital (WACC).
Answer:
VL = EBIT(1-T)/Wacc
100,000,000 = 10,000,000(.8)/WACC
WACC = 8%
My Question is when do we use VL = VU + tD instead of Market Values of D + E? You will notice the question used Market Values.
Is that only when we are given VU specifcally (or can back into using Vu = EBIT(1-t)/Ro where there is no interest), THEN the company issues debt to buy back stock? Every example in the curriciculum I can find seems to have the company issue debt from a currently unlevered firm to buy back stock, then they use that equation (VL = VU + tD) to find the D/E to back into Proposition II.
I am probably completely over-thinking this
EDIT: Now I am thinking that since 1) D/E is already provided and 2) We have no way of knowing what Vu is then there is no way to use the formula anyway. Is that correct?
Basically there is 2 ways to get VL. 1) VL = VU + tD and 2) Through the D/E ratio (and VL - Debt = Equity, NOT Vu)