Do number 4 please
Assuming that there is an unlevered firm and a levered firm. The basic information is given by the following table.
Table1: Information of the firms
|
Unlevered firm
|
Levered firm
|
EBIT
|
10000
|
10000
|
Interest
|
0
|
3200
|
Taxable income
|
10000
|
2312
|
Tax (tax rate: 34%) |
3400 |
4488
|
Net income
|
6600
|
4488
|
CFFA
|
6600
|
7688
|
Assuming that cost of debt =8%; unlevered cost of capital =10%; systematic risk of the asset is 1.5
1 Fill in the blanks
2 What is the present value of the tax shield?
3 What is the size of debt?
4 Calculate the following values:
a) value of unlevered firm; b) value of the levered firm; c) equity value; d) Cost of equity; e) cost of capital; f) systematic risk of the equity
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
6 Based on the results ofquestion (4), if there are the following two mutually exclusive projects. What is the crossover required rate of return for the two projects?
YearProject A Cash FlowProject 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?