In the M&M no-tax world, an unlevered firm has a cost of equity of 10 percent and

Question:

In the M&M no-tax world, an unlevered firm has a cost of equity of 10 percent and expected EBIT of $375,000. The firm decided to issue $2 million of debt at a cost of 6 percent to finance a project, which has an ROI of 15 percent. It has 100,000 shares outstanding.

a. Calculate the value of the firm and price per share before issuing the debt.

b. Calculate the firm’s new earnings per share after issuing the debt.

c. Calculate the value of the firm and the value of equity after the firm issues the debt.

d. Calculate the cost of equity after the firm issues the debt.

e. Calculate the new share price of the firm after it issues the debt.

Cost Of Equity
The cost of equity is the return a company requires to decide if an investment meets capital return requirements. Firms often use it as a capital budgeting threshold for the required rate of return. A firm's cost of equity represents the...