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Value of Debt R D Beta EBIT 800,000 0 5.0% 1.392500 Tax Rate 40% 250,000 5.0% 1.483015 T-bill Rate 3.0% 500,000 5.0% 1.542274 TSX 11.0%
Value of Debt | RD | Beta | ||
EBIT | 800,000 | 0 | 5.0% | 1.392500 |
Tax Rate | 40% | 250,000 | 5.0% | 1.483015 |
T-bill Rate | 3.0% | 500,000 | 5.0% | 1.542274 |
TSX | 11.0% | 750,000 | 5.0% | 1.607016 |
1,000,000 | 5.0% | 1.678038 | ||
1,250,000 | 5.0% | 1.756303 | ||
1,500,000 | 5.0% | 1.842075 | ||
1,750,000 | 5.0% | 1.939488 | ||
2,000,000 | 5.0% | 2.047619 |
This is the last year for the companys tax-exempt status. Assuming that the tax rate will be 40% and that there is no cost for the risk of default. Use the following table to answer these questions:
- Calculate the required rate of return for the un-levered firm. (2 marks)
- Calculate the market value of the un-levered firm in proposition I. (2 marks)
- Calculate the WACC for an un-levered firm in proposition II. No calculation required (1 mark)
- Using the information from the table, calculate the value of the firm (proposition I), cost of equity, and the WACC (proposition II) of the firm for each level of debt. (16 marks)
e. Using the information from your calculations draw the graphs for proposition I and proposition II.
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