Individual Project

FIN 251 Fall 2020

Due date: Nov 18^th Wednesday

Assuming that there is an unlevered firm and a levered firm. The basic information is given by the following table.

Table1: Information of the firms

	Unlevered firm	Levered firm
EBIT	10000	10000
Interest	0	3200
Taxable income
Tax (tax rate: 34%)
Net income
CFFA

Assuming that cost of debt =8%; unlevered cost of capital =10%; systematic risk of the asset is 1.5

1. Calculate the following values: a) value of unlevered firm; b) value of the levered firm; c) equity value; d) Cost of equity; e) cost of capital; f) systematic risk of the equity
2. Suppose that the firm changes its capital structure so that the debt-to-equity ratio is 1.0, then recalculate the systematic risk of the equity