Answered step by step
Verified Expert Solution
Question
1 Approved Answer
QUESTION 5: LonglastTechnologies Limited (LTL) an all equity firm has current EBIT of $1,000,000. It expects EBIT to increase at 5% per year forever. The
QUESTION 5: LonglastTechnologies Limited (LTL) an all equity firm has current EBIT of $1,000,000. It expects EBIT to increase at 5% per year forever. The corporate tax rate is 40%, and cost of unlevered equity is 12%. LTL is considering replacing some of the equity with perpetual debt. It has been determined that risk of bankruptcy is a function of amount of debt. PV of bankruptcy related costs will be $5,000,000. LTL is considering the following debt levels. Debt $3,000,000 $6,000,000 $9,000,000 Probability of Bankruptcy 0.10 0.30 0.60 a. Determine the optimal level of debt, and the value of the firm at that level. b. If personal tax rate on stock income is 25%, and the personal tax rate on bond income is 43% at what debt level value of the firm be optimal QUESTION 5: LonglastTechnologies Limited (LTL) an all equity firm has current EBIT of $1,000,000. It expects EBIT to increase at 5% per year forever. The corporate tax rate is 40%, and cost of unlevered equity is 12%. LTL is considering replacing some of the equity with perpetual debt. It has been determined that risk of bankruptcy is a function of amount of debt. PV of bankruptcy related costs will be $5,000,000. LTL is considering the following debt levels. Debt $3,000,000 $6,000,000 $9,000,000 Probability of Bankruptcy 0.10 0.30 0.60 a. Determine the optimal level of debt, and the value of the firm at that level. b. If personal tax rate on stock income is 25%, and the personal tax rate on bond income is 43% at what debt level value of the firm be optimal
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started