You are considering two identical firms one levered the other not. Both firms have expected EBIT of $600. The value of the unlevered firm (vU) is $2000. The corporate tax rate (t) is 30%. The cost of debt (rD) is 10%, and the ratio of debt to equity (D/E) is 1 for the levered firm. (a) Calculate the cost of equity for both the levered (rL) and unlevered firms (rU). (b) Calculate the weighted average cost of capital for each firm. (c) Why is the cost of equity higher for the levered firm, but the WACC lower? (d) In an MM world without taxes, what is the optimal capital structure?
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- You have the following data for your company. Market Value of Equity: $520 Book Value of Debt: $130 Required rate of return on equity: 12% Required rate of return on debt (pre-tax): 7% Corporate tax rate: 25% The company's debt is assumed to be is reasonably safe, so the book value of debt is a reasonably approximation for the market value of debt. What is the weighted average cost of capital for this company?Here is the problem: Famas's LLamas has a weighted average cost of capital of 7.9%. The company's cost of equity is 11% and its pretaxt cost of debt is 5.8%. The taxt rate is 25%. What is the company's target debt-equity ratio? Here is the solution: Here we have the WACC and need to find the debt-equity ratio of the company. Setting up the WACC equation, we find: WACC = .0790 = .11(E/V) + .058(D/V)(1 – .25) Rearranging the equation, we find: .0790(V/E) = .11 + .058(.75)(D/E) Now we must realize that the V/E is just the equity multiplier, which is equal to: V/E = 1 + D/E .0790(D/E + 1) = .11 + .0435(D/E) Now we can solve for D/E as: .0355(D/E) = .031 D/E = .8732 Question: I need help especifically with the part where they rearrange the equation as: .0790(V/E) = .11 + .058(.75)(D/E). How do they get an inverse (V/E) on the left side without the .11. And how do they get a (D/E) ratio. I understand…(c) Consider the case of two firms, ABC which is an unlevered firm and XYZ which is a levered firm. The firms have target debt-to-equity ratio (B/S) = 1, and both firms have exactly the same perpetual net operating income of Kshs.12 million before taxes. The before-tax cost of debt, kp, is the same as the risk-free rate and the corporate tax rate is 30%. Given the following market parameters: E(Rm) = 0.12, Rf = 6%. Вавс — 1, Bxyz = 1.5 (i). Find the cost of capital of each firm. (ii). Find the value of each firm.
- Find the WACC given the following information: A firm has a cost of equity of 8% and cost of debt of 6.5%. The debt - toequity ratio is 0.75. The tax rate is 15%.The Beta Corporation has an optimal debt ratio of 40 percent. Its cost of equity capital is 12 percent, and its before-tax borrowing rate is 10 percent. Given a marginal tax rate of 35 percent. Required: a. Calculate the weighted-average cost of capital. b. Calculate the cost of equity for an equivalent all-equity financed firm. Complete this question by entering your answers in the tabs below. Required A dA Required B Calculate the weighted-average cost of capital. Note: Do not round intermediate calculations. Round your answer as a percent rounded to 2 decimal places. Weighted-average cost of capitalGive typing answer with explanation and conclusion A company has an expected EBIT of $18,000 in perpetuity, a tax rate of 35%, and a debt-to- equity ratio of 0.75. The interest rate on the debt is 9.5%. The firm’s WACC is 9%. a) If the company has not debt, what would be the unlevered cost of capital and firm value? b) Suppose now the company has $55,714.29 in outstanding debt. Using your answer to part a) and M&M Proposition I with taxes, what is the value of this levered firm?
- A firm has a tax burden ratio of 0.85, a leverage ratio of 1.5, an interest burden of 0.9, and a return on sales of 12%. The firm generates $2 in sales per dollar of assets. What is the firm's ROE? (Do not round intermediate calculations. Round your answer to 2 decimal place.) ROE %Company ABC is looking to figure out its cost of equity. The company operates in the construction business where, based on a list of comparable firms, the average beta is 0.9. The comparable firms have an average debt-to-equity ratio of 0.5. Company ABC has a debt-to-equity ratio of 0.25 and a 30% tax rate. What is the ABC's Beta? O a. 0.67 O b. 0.9 OC 0.79 O d. 0.25There are two firms in the same business: Air Wolf and Red Wolf. Both are in the same risk class, and each has an EBIT (Earnings Before Interest & Taxes) of $10 million. Air Wolf has no debt and Red Wolf has $4 million of debt. The cost of equity is 8% and the cost of debt is 10%. Assume a tax rate of 30%. Calculate the: (a) total value of each firm and (b) the breakdown of value or capital structure in terms of its components (debt & equity).
- The Kanucks Ltd wants to have a weighted average cost of capital of 11 .25%. The firm has an after-tax cost of debt of 5% and a cost of equity of 13 %. What debt-equity ratio is needed for the firm to achieve the targeted weighted average cost of capital? Multiple Choice0.250.220.280.330.42A firm had a debt ratio of 0.85. The pretax cost of debt is 8% and the reqiured return on asset is 15.5%. What is the cost of equity if we factorin the firms tax rate of 24%? A) 19.53 B) 18.92 C) 21.57 D) 20.35 E) 20.961) A firm that is currently unlevered has WACC = rS = 10%/year. This company plans to do a recapitalization by issuing debt and repurchasing equity. After the recapitalization, the debt-to-equity (D/E) ratio will be 0.5. If the cost of debt, rD, is 6%, what will be rS after the recapitalization? 2) A firm with wD = 0.35 and wS = 0.65 plans to issue another $100 million of permanent debt. The firm's tax rate is 21%. The bonds will be issued at par with coupon rate = rD = 7%/year. The firm's WACC is 11%/year. By how much will the new debt change the value of the firm, and who will receive this value? A) Firm value will increase by $21 million, and all $21 million will go to the shareholders B) Firm value will increase by $9 million, and 35% will go to the bondholders, 65% to the shareholders C) Firm value will increase by $18.6 million, and 35% will go to the bondholders, 65% to the stockholders D) Firm value will increase by $21 million, and all $21 million will go to the…