Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Repeat #4 with a corporate tax rate of 30%. Company U and L have the same business (operating) risk with EBIT of 50,000$ pa (perpetuity)
Repeat #4 with a corporate tax rate of 30%.
- Company U and L have the same business (operating) risk with EBIT of 50,000$ pa (perpetuity) but L is levered with 150,000$ of perpetual debt @ 4% interest rate. Us unlevered cost of equity is 8%. The market value of Ls equity is 3 00,000$. There are no taxes.
- (2 marks) What is the levered cost of equity for L?
- (4 marks) Assuming MM are correct, what should be Bs levered cost of equity?
- (3 marks) Draw a graph of % return vs D/E ratio to illustrate your answers in (a) and (b).
- (5 marks) Show how MM would make risk free profits.
- (2 marks) What is the WACC, assuming MM are correct? Check your answer.
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