book value of debt book value of equity market value of debt market value of equity pretax cost of debt 0% debt 100% equity 25% debt / 75% equity 0 10,000 0 10,000 4% 50% debt 50% equity 2,500 5000 7.500 5000 250X) 5000 8025 6050 4% 4% levered beta risk-free rate market premium cost of equity WACC LOI ? 4% 6% 2 > 4% 6% 2 6% ? 1.265.82 1.265.82 1.265.82 ? ? ? ? 500 EBIT takes 21% EBLAT add deprecintion less capital exp Free Cash Flow Value of Firm (use the perpetuity valuation model: CF/WACC) Stock Price Firm valueumber of shares Outstanding) 500 ? 500 -500 0 ? ? 500 -500 0 2 ? D ? ? 1. What happens to firm value as the firm levers up? 2. Why doe the value change? 3. Can you find out the stock price associated with each capital structure, holding everything constant #1 #2 #3 Firm vale and Leverage with Taxes but without ankruptcy Costs Fill in the blanks and then answer the questions at the bottom of the data Assume perpetual debe and cash flows. The firm is borrowing funds and retiring equity as it levers up, book value of debt book valor of equity market value of debi market value of equity pectes cost of che det 100% city 25% debt/75% 0 10,000 0 10,000 43 2.500 7.500 2.500 N025 4% 50% debt 50 quity SOOD S000 SOOD OSO 4" 1.00 2 49 levered beta rink free role make premam cost of equity WACC 4% 69 1.05.2 1.265.2 1.265 ERIT EN 21% EBIAT add depreciation Is capitalep Free Cash Value of Firm use the perpefully valuation de CFWACC) Stock Precimaluber of shares Outstanding SOCI SKI 500 500 0 2 2 500 00 0 + 1. What happens to firm valer as the firm ser ap? 2. Why do the value change? 1. Can you find out the stock price associated with each capital structure, holding everything constant