Financial Management: Theory & Practice (MindTap Course List)
15th Edition
ISBN: 9781305632295
Author: Eugene F. Brigham, Michael C. Ehrhardt
Publisher: Cengage Learning
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Chapter 21, Problem 6P
a.
Summary Introduction
To calculate:
Value of unlevered firm
b.
Summary Introduction
To calculate:
Value of levered firm and
c.
Summary Introduction
To calculate: Value of levered firm and cost of equity levered.
d.
Summary Introduction
To discuss: The difference in part b and part 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?
Please show the graphs.
Your company’s assets have an unlevered value of 25,456,890 USD and the perpetual annual unlevered cash produced is 1,750,000 USD. The Company decides to go through with a recapitalization, after which the debt-to-equity ratio (which the company decides to keep constant) is equal to 2.5. What is the value of debt if the interest rate is 2.45% and the tax rate is 36%?
Chapter 21 Solutions
Financial Management: Theory & Practice (MindTap Course List)
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