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QUESTION 5 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 cost of equity is 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?

QUESTION 5 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 cost of equity is 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?

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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QUESTION 5

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 cost of equity is 18 percent. The tax rate is 31 percent.

Given the above information;

 

  1. 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

 

 

 

 

 

 

 

  1. b) Plot the results from the table into the following two graphs:
  2. i) Value of the firm vis-à-vis- Total debt
  3. ii) Cost of capital of the firm vis-à-vis D/E ratio.

iii) Which MM propositions have you demonstrated?

 

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