Question
Suppose EBIT (earnings before interests and taxes) of a firm in the previous financial year was 12 million, and it is expected to remain the
Suppose EBIT (earnings before interests and taxes) of a firm in the previous financial year was 12 million, and it is expected to remain the same perpetually. The effective corporate tax rate is 25 percent. The firms debt-equity ratio is 2, and its debt is worth 100 million. The firm can borrow risk free at 4 percent, while its equity beta is 1.6. By assuming that both the CAPM (Capital Asset Pricing Model) and the Modigliani-Miller Theorem with corporate taxes hold, answer the following questions.
i) What is the total value of the firm?
ii) What is the WACC (weighted average cost of capital) of the firm?
iii) What is the cost of equity of the firm?
iv) What is the cost of equity of the firm when it is unlevered?
v) What should be the expected return on the market portfolio?
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