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1. A company has an unlevered cost of capital of 10%, a tax rate of 30%, and expected earnings before interest and taxes of $5,000.
1. A company has an unlevered cost of capital of 10%, a tax rate of 30%, and expected earnings before interest and taxes of $5,000. The company has $10,000 in perpetual bonds outstanding that costs 8%. 1. What is the value of the unlevered firm? 2. What is the value of the levered firm? 3. What is the value of the equity of the levered firm? 4. What is the cost of equity? II. Suppose now that the corporation in I. is in financial distress. It has 1,000 shares of stocks outstanding that sell at a price of $25 per share. 1. What is the decrease in the value of the company due to expected bankruptcy costs? 2. Suppose the president of the company stated that the company should increase the amount of debt in its capital structure because of the tax-advantaged status of its interest payments. Her argument is that this action would increase the value of the company. How would you respond
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