cost of debt 8% unlevered cost of capital 10% systematic risk of asset 1.5 1) Unlevered Firm Levered Firm EBIT 10000 10000 Interest 0 3200 Taxable Income 10000 6800 34% Tax 3400 2312 Net Income 6600 4488 CFFA 0 -3200 2) PV of the tax shield? Value of levered firm 3200 tax rate 34% (value of levered firm*tax rate)/(1+cost of debt) PV of tax shield 1007.41 value of levered firm/cost of debt 3) Size of debt 40000 4) a) EBIT(1-T)/cost of capital Value of unlevered firm 66000 b) value of unlevered firm+Tax*size of debt Value of levered firm 79600 c) total value of unlevered firm-debt Equity value 39600 d) cost of equity cost of capital+(debt/equity)(cost of capital-cost of debt) cost of equity 12.02% e) wacc formula equity/value of levered firm*cost of equity+debt/value of levereed firm*cost of debt*(1-T) cost of capital (levered) 8.63% f) systematic risk of asset*(1+((1-T)*(debt/equity))) systematic risk of equity 2.5 Hi I really need help with question 5! Thank you so much! 5. Suppose that the firm changes its capital structure so that the debt-to-equity ratio is 1.0, then recalculate the systematic risk of the equity check_circle Expert Answer Step 1 Systematic risk of the equity is calculated using the unlevered systematic risk and debt equity ratio of 1 as below. help_outline fullscreen Step 2 Answer: levered beta or systematic risk of the equity when debt to equity ratio is 1 would be 2.49. Here is the QUESTION: Based on the results of questions (4), if there are the folllwoing two mutually exclusive projects what is the crossover required rater of return for the two projects. Year Project A Cash Flow Project B Cash Flow 0 75,000 75,000 1 26,300 24,000 2 29,500 26,900 3 45,300 51,300 7) Based on the previous discussions, are you going to accept project A or B? Why?

cost of debt 8% unlevered cost of capital 10% systematic risk of asset 1.5 1) Unlevered Firm Levered Firm EBIT 10000 10000 Interest 0 3200 Taxable Income 10000 6800 34% Tax 3400 2312 Net Income 6600...

cost of debt	8%
unlevered cost of capital	10%
systematic risk of asset	1.5
1)
		Unlevered Firm	Levered Firm
	EBIT	10000	10000
	Interest	0	3200
	Taxable Income	10000	6800
34%	Tax	3400	2312
	Net Income	6600	4488
	CFFA	0	-3200

2)	PV of the tax shield?

	Value of levered firm	3200
	tax rate	34%
		(value of levered firm*tax rate)/(1+cost of debt)
	PV of tax shield	1007.41

		value of levered firm/cost of debt
3)	Size of debt	40000

4)
a)		EBIT(1-T)/cost of capital
	Value of unlevered firm	66000

b)		value of unlevered firm+Tax*size of debt
	Value of levered firm	79600

c)		total value of unlevered firm-debt
	Equity value	39600

d)	cost of equity	cost of capital+(debt/equity)(cost of capital-cost of debt)
	cost of equity	12.02%

e)		wacc formula
		equity/value of levered firmcost of equity+debt/value of levereed firmcost of debt*(1-T)
	cost of capital (levered)	8.63%

f)		systematic risk of asset(1+((1-T)(debt/equity)))
	systematic risk of equity	2.5

Hi I really need help with question 5! Thank you so much!

5. Suppose that the firm changes its capital structure so that the debt-to-equity ratio is 1.0, then recalculate the systematic risk of the equity

check_circle

Expert Answer

Step 1

Systematic risk of the equity is calculated using the unlevered systematic risk and debt equity ratio of 1 as below.

help_outline
fullscreen

Step 2

Answer: levered beta or systematic risk of the equity when debt to equity ratio is 1 would be 2.49.

Here is the QUESTION:

Based on the results of questions (4), if there are the folllwoing two mutually exclusive projects what is the crossover required rater of return for the two projects.

Year Project A Cash Flow Project B Cash Flow

0 75,000 75,000

1 26,300 24,000

2 29,500 26,900

3 45,300 51,300

7) Based on the previous discussions, are you going to accept project A or B? Why?

Jun 03, 2022

SOLUTION.PDF

cost of debt 8% unlevered cost of capital 10% systematic risk of asset 1.5 1) Unlevered Firm Levered Firm EBIT 10000 10000 Interest 0 3200 Taxable Income 10000 6800 34% Tax 3400 2312 Net Income 6600...

Expert Answer

Get Answer To This Question

Related Questions & Answers

Submit New Assignment