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Suppose we are in perfect capital markets with taxes. The all equity firm, TSM, is has a perpetual EBIT of $185.00. The firm is considering
Suppose we are in perfect capital markets with taxes. The all equity firm, TSM, is has a perpetual EBIT of $185.00. The firm is considering to issue $300.00 worth of long-term debt which has an interest rate of 8%. The tax rate is 40%. The firm has a ROE of 18% and returns all earnings as dividends.
a. What is the unlevered value of TSM?
b. What is the levered value of TSM under the new debt policy?
c. What is the effect on the levered cost of equity?
d. What is the effect on the WACC?
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