Question
. Assuming that there is an unlevered firm and a levered firm. The basic information is given by the following table. Table1: Information of the
. Assuming that there is an unlevered firm and a levered firm. The basic information is given by the following table.
Table1: Information of the firms
|
| Unlevered firm | Levered firm |
| EBIT | 20000 | 20000 |
| Interest |
|
|
| Taxable income |
|
|
| Tax (tax rate: 34%) |
|
|
| Net income |
|
|
| CFFA |
|
|
Assuming that: The size of the debt is 8000; cost of debt =8%; unlevered cost of capital =10%; systematic risk of the asset is 1.5
- Fill in the blanks
- What is the present value of the tax shield?
- Calculate the following values: a) value of unlevered firm; b) value of the levered firm; c) equity value; d) Cost of equity; e) cost of capital; f) systematic risk of the equity
- Suppose that the firm changes its capital structure so that the debt-to-equity ratio is 1.6, then recalculate the systematic risk of the equity
If the firm now has the following project: in year 0, the cashflow is 5000, in year 1, the cashflow is -5500. Based on the IRR rule, will this project be accepted?
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Advanced Accounting
Authors: Joe Hoyle, Thomas Schaefer, Timothy Doupnik
10th edition
0-07-794127-6, 978-0-07-79412, 978-0077431808
