Question
RubberDuck Inc. is a startup company that produces rubber toys. RubberDuck has con- stant free cash flows of USD 3.54 million. It maintains a debt-equity
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RubberDuck Inc. is a startup company that produces rubber toys. RubberDuck has con- stant free cash flows of USD 3.54 million. It maintains a debt-equity ratio of 0.50. Suppose RubberDucks unlevered equity cost of capital is 14.00%. The relevant tax rate is 30.00%. RubberDucks debt is risk free, and the risk-free interest rate is 7.00%.
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a) What is RubberDucks levered cost of equity (rE )?
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b) If you assume there are no taxes, what is the unlevered value of RubberDuck (using the pretax WACC = ru)? How would the value of RubberDuck change if it chooses to increase the debt-equity ratio (no computation needed)?
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c) Given the relevant tax rate, what is its after-tax weighted average cost of capital?
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d) What is the current value of the firm and what is the total value of the interest tax shield?
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Analysis Of Financial Data
Authors: Gary Koop
1st Edition
0470013214, 978-0470013212
