Clarion Manufacturing Company is a publicly held company that is engaged in the manufacture of home and office furniture. The firms most recent income statement and balance sheet are found below.

(Footnote 6: All Liabilities are assumed to be interest bearing)

a. Clarions future operating earnings are flat ( i. e., no growth), and it anticipates making capital expenditures equal to depreciation expense with no increase anticipated in the firms net working capital. What is the value of the firm using the APV model? To respond to this question, you may assume the following: The firms current borrowing rate is the same as the 9% rate it presently pays on its debt, all the firms liabilities are interest bearing, the firms unlevered cost of equity is 12%, and the firms tax rate is 30%. Depreciation expense is $2,000 (all the other expenses remain the same so assume that depreciation is in already in there and not in addition to the amounts already given) in the given income statement. b. What is the value of Clarions equity (i. e., its levered equity) under the circum-stances described in part (a)? c. What is Clarions weighted average cost of capital, given your answers to parts (a) and ( b)? d. Based on your answers to parts (a) to (c), what is Clarions levered cost of equity? ⁷

(Footnote 7: A firm's levered cost of equity represents the rate of return that investors require when investing in the firm's common equity, goven the firm's present use of financial leverage) e. If the risk- free rate is 5.25% and the market risk premium is 7%, what is Clarions levered beta? What is Clarions unlevered beta?

Income Statement ($000) Sales Cost of goods sold Gross profit Selling and administrative expenses Operating income Interest expense Earnings before taxes Taxes Net income Balance Sheet ($000) Current assets Fixed assets 16,000 (9,000) 7,000 (2,000) 5,000 (630) 4,370 (1311) 3,059 5,000 9,000 $14,000 Liabilities6 Owners' equity 7000 7,000 14,000