Orange Inc, a cell-phone manufacturer, is an all equity firm. At the e

Orange Inc, a cell-phone manufacturer, is an all equity firm. At the end of the current year, the CFO expects EBIT to be $100 and the same earnings are expected annually in perpetuity.

The company is not growing so CAPEX and investments in net working capital are zero. The cost of equity for Orange is 10%. Orange’s prime competitor is Verge Inc, manufacturer of the Blueberry smartphone. Verge is identical to Orange Inc in every respect except that Verge has $130.44 of long term debt outstanding. What is the value of Verge Inc? The corporate tax rate is 40%.
A) $500
B) $600
C) $630
D) $652
E) $1,000

ANSWER

D