Unlevering the Equity Cost of Capital-Low Leverage & High Leverage Companies: Below, we show the information for two potential comparable companies. Calculate the unlevered cost of capital based on the following assumptions. Neither company expects its free cash flows to grow. Income tax rate for interest (TINT) Value of debt Value of preferred stock. Value of equity Maturity of debt (years) Debt cost of capital Preferred stock cost of capital. Equity cost of capital Low Leverage Company 35.0% $ 4,000 $ 1,000 $15,000 Perpetual 5.0% 6.0% 11.8% High Leverage Company 45.0% $45,000 $ 0 $ 5,000 Perpetual 8.0% 28.0% a. b. C. Assume that interest is tax deductible and that the discount rate for all interest tax shields is the unlevered cost of capital. Assume that interest is tax deductible and that the discount rate for all interest tax shields is the cost of debt. Assume that interest is tax deductible but that the company refinances its debt at the end of each year (annual refinancing).

Unlevering the Equity Cost of Capital-Low Leverage & High Leverage Companies: Below, we show the information for two potential comparable companies. Calculate the unlevered cost of capital based on the following assumptions. Neither company expects its free cash flows to grow. Income tax rate for interest (TINT) Value of debt Value of preferred stock. Value of equity Maturity of debt (years) Debt cost of capital Preferred stock cost of capital. Equity cost of capital Low Leverage Company 35.0% $ 4,000 $ 1,000 $15,000 Perpetual 5.0% 6.0% 11.8% High Leverage Company 45.0% $45,000 $ 0 $ 5,000 Perpetual 8.0% 28.0% a. b. C. Assume that interest is tax deductible and that the discount rate for all interest tax shields is the unlevered cost of capital. Assume that interest is tax deductible and that the discount rate for all interest tax shields is the cost of debt. Assume that interest is tax deductible but that the company refinances its debt at the end of each year (annual refinancing).

Entrepreneurial Finance

6th Edition

ISBN:9781337635653

Author:Leach

Publisher:Leach

Chapter14: Security Structures And Determining Enterprise Values

Section: Chapter Questions

Problem 1hM

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