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Shalom Limited is an all-equity firm with 1,000 shares of common stock outstanding. Investors require a 20 percent return on Shalom Limited's unlevered equity. The
Shalom Limited is an all-equity firm with 1,000 shares of common stock outstanding. Investors require a 20 percent return on Shalom Limited's unlevered equity. The company distributes all of its earnings to equity holders as dividends at the end of each year. Shalom Limited estimates that its annual earnings before interest and taxes (EBIT) will be Ksh 400,000. These earnings will remain constant throughout the life of the firm. a) Assuming there are no corporate or personal taxes i) Compute value of the unlevered firm? ii) Suppose Shalom Limited issues Ksh 750,000 of debt at an interest rate of 10 percent and uses the proceeds to retire part of equity. Compute new value of the firm and equity. b) Assume the corporate tax is 30% and there are no personal taxes i) Compute the value of the unlevered firm? ii) Suppose Shalom Limited issues Ksh 750,000 of debt at an interest rate of 10 percent and uses the proceeds to retire part of equity. Compute the new value of the firm and equity. c) Assume the corporate tax is 30% and there 10% personal taxes on both dividends and interest i) Compute the value of the unlevered firm? ii) Suppose Shalom Limited issues Ksh 750,000 of debt at an interest rate of 10 percent and uses the proceeds to retire part of equity. Compute the new value of the firm and equity
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