Question
Kofi Belle Ltd is an all-equity financed firm with GHS 50,000 in equity at a cost of 30%. The firm has constant earnings before interest
Kofi Belle Ltd is an all-equity financed firm with GHS 50,000 in equity at a cost of 30%. The firm has constant earnings before interest and taxes (EBIT) of GHS 7,000 and a tax rate of 25%. The firm is considering taking on debt and the CFO has determined the optimal debt amount to be GHS 20,000 at an interest rate of 20% and the bankruptcy cost of this debt level to be GHS 2,000.
a. what is the firm's unlevered cost of equity?
b. find optimal capital structure when bankruptcy costs are considered?
c. what will be the value of firm at optimal capital structure?
d. determine the total market value
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