Question
Q Corporation and R Inc. are two companies with very similar characteristics. The only difference between the two companies is that Q Corporation is an
Q Corporation and R Inc. are two companies with very similar characteristics. The only difference between the two companies is that Q Corporation is an unlevered firm, and R Inc. is a levered firm with debt of $3.5 million and cost of debt of 10%. Both companies have earnings before interest and taxes (EBIT) of $1.5 million and a marginal corporate tax rate of 35%. Q Corporation has a cost of capital of 15%.
a. What is Q Corporations firm value?
b. What is R Inc.s firm value?
c. What is R Inc.s equity value?
d. What is Q Corporations cost of equity capital?
e. What is R Inc.s cost of equity capital?
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