Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN: 9781337395083
Author: Eugene F. Brigham, Phillip R. Daves
Publisher: Cengage Learning
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Question
Chapter 17, Problem 8P
a)
Summary Introduction
To determine: The value of
b)
Summary Introduction
To determine: The value of
c)
Summary Introduction
To determine: The value of
d)
Summary Introduction
To determine: The difference between answers to part b and c.
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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
$100,000.00
Cost of debts
11%
cost of equity when unlevered
18%
Tax rate
31%
Debts
$0
$10,000.00
$20,000.00
$30,000.00
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 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 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
$100,000.00
Cost of debts
11%
cost of equity when unlevered
18%
Tax rate
31%
Debts
$0
$10,000.00
$20,000.00
$30,000.00
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 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 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
$100,000.00
Cost of debts
11%
cost of equity when unlevered
18%
Tax rate
31%
Debts
$0
$10,000.00
$20,000.00
$30,000.00
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 debtii) Cost of capital of the firm vis-à-vis D/E ratio.iii) Which MM propositions have you demonstrated?
Please show the graphs.
Chapter 17 Solutions
Intermediate Financial Management (MindTap Course List)
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