Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

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

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

10000

10000

Interest

0

3200

Taxable income

Tax (tax rate: 34%)

Net income

CFFA

Assuming that cost of debt =8%; unlevered cost of capital =10%; systematic risk of the asset is 1.5

1)Fill in the blanks

2)What is the present value of the tax shield?

3)What is the size of debt?

4)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

5)Suppose that the firm changes its capital structure so that the debt-to-equity ratio is 1.0, then recalculate the systematic risk of the equity

6)Based on the results of question (4), if there are the following two mutually exclusive projects. What is the crossover required rate of return for the two projects?

7)Based on the previous discussions, are you going to accept project A or B? Why? 

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial Markets and Institutions

Authors: Jeff Madura

12th edition

9781337515535, 1337099740, 1337515531, 978-1337099745

More Books

Students also viewed these Finance questions