1 Vu VI E 120000 126000 111000 10.16% 0.08952381 Re Ra Crossover rate A B Dilt 0 -60000 -15000 - 75000 3000) 1 2 3000 -5000 2 2 3 3 28000 50000 33000 26000 24000 13.96% 2 Systematic risk of the asset is 2 Now assuming that the firm issues $15,000 debt to buy back some shares, and the debts are traded at par value. Assuming that the cost of debt =8% The firm originally is 100% financed by equity (unlevered firm). The EBIT for this firm is 20,000. The cost of capital for this unlevered firm is 10%. The tax rate is 40% 1 Calculate the following values for the unlevered firm a.) value of unlevered firm b.) equity value for the unlevered firm Vu 120000 2. Calculate the following values for the levered firm a.) value of lovered firm b.) equity value for levered firm c.) cost of equity for levered firm d.) cost of capital for levered firm 126,000 4. If now the (levered) firm considers the following two mutually exclusive projects: What is the cross-over rate for these two projects? A yes Diff 13.96%7777 0 -75000 -60000 -15000 1 30000 27000 3000 2 28000 33000 -5000 50000 26000 24000 13.95% 1 Vu 120000 2 VI 126000 5. Based on the answers of question 4 which project would you like to choose? WHY? 3 E 111000 3 1 Vu VI E 120000 126000 111000 10.16% 0.08952381 Re Ra Crossover rate A B Dilt 0 -60000 -15000 - 75000 3000) 1 2 3000 -5000 2 2 3 3 28000 50000 33000 26000 24000 13.96% 2 Systematic risk of the asset is 2 Now assuming that the firm issues $15,000 debt to buy back some shares, and the debts are traded at par value. Assuming that the cost of debt =8% The firm originally is 100% financed by equity (unlevered firm). The EBIT for this firm is 20,000. The cost of capital for this unlevered firm is 10%. The tax rate is 40% 1 Calculate the following values for the unlevered firm a.) value of unlevered firm b.) equity value for the unlevered firm Vu 120000 2. Calculate the following values for the levered firm a.) value of lovered firm b.) equity value for levered firm c.) cost of equity for levered firm d.) cost of capital for levered firm 126,000 4. If now the (levered) firm considers the following two mutually exclusive projects: What is the cross-over rate for these two projects? A yes Diff 13.96%7777 0 -75000 -60000 -15000 1 30000 27000 3000 2 28000 33000 -5000 50000 26000 24000 13.95% 1 Vu 120000 2 VI 126000 5. Based on the answers of question 4 which project would you like to choose? WHY? 3 E 111000 3