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BDE Inc. is an unlevered firm which expects to generate a net cash flow of $25 million per year in perpetuity. The firms required return

BDE Inc. is an unlevered firm which expects to generate a net cash flow of $25 million per year in perpetuity. The firms required return on equity is 10%. Assume that the Modigliani and Miller assumptions hold. (15 points)

For questions 27 and 28 assume that the corporate tax rate is zero.

  1. What is the value of the unlevered firm?

  1. Suppose the firm changes its capital structure to 40% debt and 60% equity, and the cost of debt is 4%. What is the new WACC?

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