Exercise $17$

Bruin Industries just issued $$325,000$ of perpetual $7$ percent debt and used the proceeds to repurchase stock. The company expects to generate $$146,000$ of earnings before interest and taxes in perpetuity. The company distributes all its earnings as dividends at the end of each year. The firm's unlevered cost of capital is $10\mathrm{.}5$ percent, and the corporate tax rate is $21$ percent.

a$.$ What is the value of the company as an unlevered firm?

b$.$ Use the adjusted present value method to calculate the value of the company with leverage.

c$.$ What is the required return on the firm's levered equity?

d$.$ Use the flow to equity method to calculate the value of the company's equity.