Referring to Table 13.2, calculate the market value of firm L (without a corporate income tax) if the equity amount in its capital structure decreases to $5,000 and the debt amount increases to $5,000. At this capital structure, the cost of equity is 15percent.

Transcribed Image Text:

Table 13.2 Capital Structure Without a Corporate Income Tax Financial Data of Firms U and L Firm U rm Net operating income (EBIT) Less: Interest payments to debt holders, I Income available to stockholder (dividends). D Total income available to security holders D1000 L000 Required rate of return on debt, k Market value of debt, (B kd $1,000 $1,000 $1,000 $900 5% $ 2,000 10% Required rate of return on equity, kg Market value of equity, (E DIka Market value of firm. (E+ B) 1 1.25% $10,000 8,000 $10000 10000