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Problem 3 ( 4 3 marks ) Texas Inc. has an EBIT of $ 4 5 0 , 0 0 0 that it expects it
Problem marks
Texas Inc. has an EBIT of $ that it expects it will earn forever, and it pays all of
its earnings as dividends to shareholders ie no growth The firm has a corporate tax
rate of and has an unlevered beta of The firm has common shares
issued and outstanding. In the market, you observe that Government Tbills are being
sold to yield and the S&PTSX Composite Index is expected to yield Assume a
world of taxes and a cost for the risk of default.
a Calculate the value of the firm. marks
b Calculate the WACC for the firm. marks
c What is the value of a share in the company and what is the EPS? marks
d What is the value of the firm if the firm issues $ of bonds at par with a
coupon rate of The beta for the equity of the leveraged firm is
marks
e What is the value of the firm if the firm issues $ of bonds at par with a
coupon rate of The beta for the equity of the leveraged firm is
marks
f What is the optimal level of debt, $ or $ Explain. marks
g What is the WACC for the firm at the optimal level of debt? marks
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