Bruce & Co. expects its EBIT to be $100,000 every year forever. The firm canborrow at 11 percent. Bruce currently has no debt, and its cost of equity is18 percent. The tax rate is 31 percent.Given the above information;a) Complete the table given below for varying levels of debt below by usinga mix of the given information and using your own computations.EBIT $100,000Cost of debt 11%Cost of equity when unlevered 18%Tax rate 31%Debt $0 $10,000 $20,000 $30,000Cost of Equity when leveredEquityD/EVuVLWACCb) Plot the results from the table into the following two graphs:i) Value of the firm vis-à-vis- Total debtii) Cost of capital of the firm vis-à-vis D/E ratio.iii) Which MM propositions have you demonstrated?
Bruce & Co. expects its EBIT to be $100,000 every year forever. The firm can
borrow at 11 percent. Bruce currently has no debt, and its
18 percent. The tax rate is 31 percent.
Given the above information;
a) Complete the table given below for varying levels of debt below by using
a mix of the given information and using your own computations.
EBIT $100,000
Cost of debt 11%
Cost of equity when unlevered 18%
Tax rate 31%
Debt $0 $10,000 $20,000 $30,000
Cost of Equity when levered
Equity
D/E
Vu
VL
WACC
b) Plot the results from the table into the following two graphs:
i) Value of the firm vis-à-vis- Total debt
ii) Cost of capital of the firm vis-à-vis D/E ratio.
iii) Which MM propositions have you demonstrated?
Step by step
Solved in 2 steps with 4 images
