need answers for E and F. please show working and formulas.
here is the answers for the other questions
The Teenie Tiny Company is currently an un- levered firm with a beta of 1.3925. Since this is a start-up company with significant impact on the social well-being of the country, the firm was given a tax-exempt status for the first five years of operation. In the market, you observe that the latest Government of Canada T-bill issue is yielding 3% and the market risk premium is 8%. The EBIT for problem 1 is $800,000 1. Assume that there is no cost for the risk of default (all debt will be issued with a 5% coupon interest rate. a. Calculate the required rate of return for the un- levered firm. (2 marks) b. Calculate the market value of the firm using proposition I. (2 marks) c. Calculate the WACC for the firm using proposition II. (1 mark) d. If the firm issues $750,000 in debt, calculate the total value of the firm, cost of equity, and the WACC (8 marks) e. If the firm issues $2,000,000 in debt, calculate the total value of the firm, cost of equity, and the WACC (8 marks) f. Graph the results of your calculations a) at present level debt = 0 as per CAPM required return = Rf + Beta*(Rm Rf) where, Rf = risk free rate Rm - Rf = market risk premium required rate of return = 3% + 1.3925*8% = 14.14%b) given EBIT = 800,000 Market value formula = EBIT / required return = 800,000 / 14.14% = 5,657,708.63 c) WACC = We*Ke + Wd*Kd*(1 - tax) where We and Wd = weights of debt and equity Ke and Kd = cost of debt and equity since debt = 0 WACC = cost of equity = 14.14% d) here first lets clculate cost of levered equity we have calculated value of firm = 5,657,708.63 debt given = 750,000 so value of equity = value of firm - debt = 5,657,708.63 - 750,000 = $4,907,708.63 Debt(D) = 750,000 Equity (E) = 4,907,708.63 now we have to calculate cost of levered equity using the following formula cost of levered equity = cost of unlevered equity + [(D/E)*cost of unlevered equity - cost of debt] D/E = 750,000/ 4,907,708.63 = 0.1528208 cost of levered equity = 14.14% +0.1528208* (14.14% - 5%) = 15.54% WACC: We = 4,907,708.63/5,657,708.63 = 0.8674 Wd = 1 - We = 1 - 0.8674 = 0.1326 WACC = 0.8674*15.54% + 0.1326*5%*(1- n%) [tax = 0 The Teenie Tiny Company is currently an un- levered firm with a beta of 1.3925. Since this is a start-up company with significant impact on the social well-being of the country, the firm was given a tax-exempt status for the first five years of operation. In the market, you observe that the latest Government of Canada T-bill issue is yielding 3% and the market risk premium is 8%. The EBIT for problem 1 is $800,000 1. Assume that there is no cost for the risk of default (all debt will be issued with a 5% coupon interest rate. a. Calculate the required rate of return for the un- levered firm. (2 marks) b. Calculate the market value of the firm using proposition I. (2 marks) c. Calculate the WACC for the firm using proposition II. (1 mark) d. If the firm issues $750,000 in debt, calculate the total value of the firm, cost of equity, and the WACC (8 marks) e. If the firm issues $2,000,000 in debt, calculate the total value of the firm, cost of equity, and the WACC (8 marks) f. Graph the results of your calculations a) at present level debt = 0 as per CAPM required return = Rf + Beta*(Rm Rf) where, Rf = risk free rate Rm - Rf = market risk premium required rate of return = 3% + 1.3925*8% = 14.14%b) given EBIT = 800,000 Market value formula = EBIT / required return = 800,000 / 14.14% = 5,657,708.63 c) WACC = We*Ke + Wd*Kd*(1 - tax) where We and Wd = weights of debt and equity Ke and Kd = cost of debt and equity since debt = 0 WACC = cost of equity = 14.14% d) here first lets clculate cost of levered equity we have calculated value of firm = 5,657,708.63 debt given = 750,000 so value of equity = value of firm - debt = 5,657,708.63 - 750,000 = $4,907,708.63 Debt(D) = 750,000 Equity (E) = 4,907,708.63 now we have to calculate cost of levered equity using the following formula cost of levered equity = cost of unlevered equity + [(D/E)*cost of unlevered equity - cost of debt] D/E = 750,000/ 4,907,708.63 = 0.1528208 cost of levered equity = 14.14% +0.1528208* (14.14% - 5%) = 15.54% WACC: We = 4,907,708.63/5,657,708.63 = 0.8674 Wd = 1 - We = 1 - 0.8674 = 0.1326 WACC = 0.8674*15.54% + 0.1326*5%*(1- n%) [tax = 0
