What is the value of the unlevered firm

Assignment Help Basic Computer Science
Reference no: EM132199188

Please show all formulas and calculations.

1. Suppose the world is perfect except that firms have to pay corporate taxes. A firm with no debt has earnings before interest and taxes (EBIT) of $60,000. The firm expects to keep earning the same EBIT in all future years. The firm's cost of capital is 14%. Assume there is no depreciation, capital expenditures, or net working capital. The corporate tax rate is 30%.

A levered firm with the same operations and assets has $100,000 of debt. The firm expects to keep its debt at the same level in all future years. The interest rate of the outstanding debt and the cost of debt are both assumed to be 8% in all future years. The corporate tax rate is also 30%.

a) What is the value of the unlevered firm?

b) What is the value of the levered firm?

2. How would a firm's optimal debt-equity ratio change (if at all) if its (marginal) tax rate went down? Please explain your answer.

Reference no: EM132199188

Questions Cloud

What is the purpose of government regulation : What is the purpose of government regulation in the business and finance?
Firm opportunity cost of capital : Why is the firm's cost of capital often referred to as the firm's opportunity cost of capital
Coefficient between the returns of the bond fund : What is the correlation coefficient between the returns of the Bond Fund (B) and the Stock Fund (S)?
What is the equivalent cash price : What is the equivalent cash price if money is worth 5.75% compounded semi-annually?
What is the value of the unlevered firm : a) What is the value of the unlevered firm? b) What is the value of the levered firm?
Per-share value of the company stock : There are 10,000,000 shares outstanding. The per-share value of the company's stock is closest to:
Best assessment of the? stock valuation : The stock has a beta of? 1.2, the market has an expected return of? 16%, and the? risk-free rate is? 6%. What is the best assessment of the? stock's valuation?
Optimal capital structure has been achieved : The optimal capital structure has been achieved when the:
What is shareholder equity : What is shareholder's equity? What is the current ratio?

Reviews

Write a Review

Basic Computer Science Questions & Answers

  Find the opportunity cost of producing

a) Find the opportunity cost of producing each unit of food in terms of clothing. Explain its pattern. b) Assume we are currently producing 6 units of clothing and 4 units of food. Plot this point and interpret it economically.

  What is a project plan

What is a project plan? List what a project plan can accomplish.

  Reservation prices of customers

Time Warner could offer the History Channel (H) and Showtime (S) individually or as a bundle of both. Suppose the reservation prices of customers

  Amount of disaster recovery planning

Consider the statement: "No amount of disaster recovery planning will ever be enough to assure the recovery of a really large organization

  Differences between importing and linking

What are the differences between importing and linking?

  Find critical path in a weighted directed acyclic graph

How to find the critical path in a weighted, directed, acyclic graph. Write a method that will find the critical path. You may assume the existence of a method that tests whether a graph is acyclic.

  Find customer from the database based

Create a third page with a search box so that you can find customer from the database based on name. (5) Customer Example Page Name: * Phone: E-mail Address: * City: Country: How did you find us? Search Engine?Link From Another Site?News Article? ..

  Compared to earlier generations

Some claim that younger web users who grew up with social media like Facebook and Twitter have a reduced expectation of privacy compared to earlier generations.

  Compare with that of a general pda

c) Could the Mark 100 or Mark 200X process this string: 0n1n? How about 1n0m1m0n? Succinctly justify you answer. d) How does the power of the Mark 100 and Mark 200X compare with that of a general PDA? Succinctly justify your answer.

  Discuss some options for mobile wireless

Please discuss some options for mobile wireless internet connection, and describe the types of hardware that would be involved in making such a connection

  History of the human race

According to Jared Diamond, the worst mistake in the history of the human race is agriculture. What does this mistake have to do with technology and society?

  Determine the irradiation and radiosity for the upper plate

Determine the irradiation and radiosity for the upper plate. What is the radiosity for the lower plate? What is the net radiation exchange between the plates per unit area of the plates?

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd