Question
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.
- What is the value of the unlevered firm?
- 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?
For questions 29 and 30 assume that the corporate tax rate is 30%.
- What is the value of the unlevered firm?
- Suppose the firm changes its capital structure to 40% debt and 60% equity, and the cost of debt is 4%. According to M&M, what is the value of the levered firm?
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Statistics Informed Decisions Using Data
Authors: Michael Sullivan III
5th Edition
9780134133539
