Salmon Inc. has debt with a book value of $2000 and a total market value of $3,000.
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Question:
Salmon Inc. has debt with a book value of $2000 and a total market value of $3,000. This debt has a interest rate of 7% and pays interest annually. The expected earnings before interest and taxes is $1,200, the tax rate is 34%, and the unlevered cost of capital is 12%. What is the firm's cost of equity and what is the unlevered firm value? Do you expect cost of equity to be higher or lower than 12% and why?
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