Lizzie Inc. is an apparel manufacturer with 200 million shares outstanding, trading at $15/share and $1.2 billion in debt outstanding (in market value terms). If the marginal tax rate for the firm is 40%, the cost of bankruptcy is 20% of current firm value and the probability of bankruptcy at the current debt level is 25%, what is the unlevered value of the firm? $2,670 million $3,930 million $4,200 million $4,470 million None of the above
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
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