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

• Fill in the blanks
• What is the present value of the tax shield?
• What is the size of debt?
• 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 1.0, then recalculate the systematic risk of the equity