Question
Assuming that there is an unlevered firm and a levered firm. The basic information is given as follows: The firm originally is 100% financed by
Assuming that there is an unlevered firm and a levered firm. The basic information is given as follows: The firm originally is 100% financed by equity (Unlevered firm). The EBIT for the firm is $20,000. The cost of capital for this unlevered firm is 10%. The tax rate is 40%. Systematic risk of the asset is 2. Now assuming that the firm issues $15,000 debt to buy back some shares (Levered firm), and the debts are traded at par value. Assuming that the cost of debt =8%. HINT: You may want to use the capital structure (suggested solution) Spreadsheet in the Brightspace 1) What is the annual tax shield? 2) What is the present value of the annual tax shield? 3) What is the value for the unlevered firm. 4) What is the value for the levered firm. 5) What is the value for equity of the levered firm. 6) What is the cost of equity of the levered firm. 7) What is the WACC of the levered firm
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