What would be the value of the firm if it were unlevered

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Reference no: EM131874108

A firm finances its operations with some equity and by borrowing $15M at an annual interest rate of 8%. It generates EBIT of $2.5M every year and is subject to a corporate income tax rate of 35%. Suppose the required return on the assets of an otherwise identical unlevered firm is 12.5%.

(A) What would be the value of the firm if it were unlevered?

(B) What is the current value of the firm?

(C) What would be the firm’s value, if in addition to its being taxed at the corporate level, its equity investors are taxed at 15% on their dividend income and its debt investors are taxed at 25% on their interest income?

Reference no: EM131874108

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