1.Suppose an unleveraged company in a world without taxes has $250 million in assets.

a.With 8 million outstanding shares of stock, what is the price of each share?

b.Suppose the expected EBIT for this company is $27.5 million per year. Calculate each of the following:

ROA

ROE

EPS

WACC

Cost of Equity

c.Now, suppose you wish to shift the capital structure of this company, issuing $65 million in bonds and using the proceeds to buy up shares of stock. How many shares will be outstanding after this shift? (show)

d.If the interest rate on your debt is 6.2%, what is your expected EBT? (show)

e.Calculate each of the following for the newly leveraged firm:

ROA

ROE

EPS

WACC

Cost of Equity

f.Now, take the same firm, but put it in an environment where there is a 21% tax rate.

g.What is the value of the unleveraged firm in the world with taxes and what will be the price of each equity share?

h.Calculate each of the following for the unleveraged firm:

ROA

ROE

EPS

WACC

Cost of Equity

i.What is the value of the leveraged firm in the world with taxes and what will be the price of each equity share?

j.Calculate each of the following for the leveraged firm:

ROA

ROE

EPS

WACC

Cost of Equity