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, R, = 6%, BABc = 1, Bxvz = 1.5 (i). Find the cost of capital of each firm. (ii). Find the value of each firm.
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, R, = 6%, BABc = 1, Bxvz = 1.5 (i). Find the cost of capital of each firm. (ii). Find the value of each firm.
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter16: Capital Structure Decisions
Section: Chapter Questions
Problem 3MC
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Transcribed Image Text:(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.
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