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 Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter21: Dynamic Capital Structures And Corporate Valuation

Section: Chapter Questions

Problem 10SP

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