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Need B and C 23. The Kimberly Corporation is currently a zero growth firm with an expected EBIT of $100,000 and zero debt financing, and
Need B and C
23. The Kimberly Corporation is currently a zero growth firm with an expected EBIT of $100,000 and zero debt financing, and the cost of equity to an unleveled firm in the same risk class is 16.0 percent. (b) Now, assume that Kimberly still pays no taxes but now decides to use $500,000 of 12.0 percent debt financing. Write down (do not calculate) the value of the firm according to the MM specification and explain (in one, very short sentence) why you can do so. (c) At the level of debt in part (b) (i.e. $500,000), Kimberly's cost of levered equity (RE.L) 32%. (i) By considering the cash flow to equity investors in firm L, calculate the value of this levered firm's equity (EL), and show that VL EL + D (ii) Name (i.e., write down) the MM proposition that was used to calculate RE.L. 23. The Kimberly Corporation is currently a zero growth firm with an expected EBIT of $100,000 and zero debt financing, and the cost of equity to an unleveled firm in the same risk class is 16.0 percent. (b) Now, assume that Kimberly still pays no taxes but now decides to use $500,000 of 12.0 percent debt financing. Write down (do not calculate) the value of the firm according to the MM specification and explain (in one, very short sentence) why you can do so. (c) At the level of debt in part (b) (i.e. $500,000), Kimberly's cost of levered equity (RE.L) 32%. (i) By considering the cash flow to equity investors in firm L, calculate the value of this levered firm's equity (EL), and show that VL EL + D (ii) Name (i.e., write down) the MM proposition that was used to calculate RE.LStep by Step Solution
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