1. Use the following information to answer the questions. Case I: Capital structure (no corporate tax)...
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1. Use the following information to answer the questions. Case I: Capital structure (no corporate tax) Debt-to-firm value (D/V): 0% Cost of equity: 10% Cost of debt: 6% Case II: Capital structure (corporate tax) Debt: $0 million EBIT: $40 million Tax rate: 50% Unlevered cost of capital: 10% 1) In Case I, when the debt-to-firm value (D/V) increases from 0% to 50%, i) Figure out the new cost of equity. (30points). ii) Figure out the old WACC with zero debt. Figure out the new WACC with debt of 50%. (30points). 2) In Case II, when the debt increases from $0 to $60mil., i) Figure out the levered firm's value. (30points) ii) Figure out the optimal capital structure. In other words, does the capital structure affect the WACC? (30points) 1. Use the following information to answer the questions. Case I: Capital structure (no corporate tax) Debt-to-firm value (D/V): 0% Cost of equity: 10% Cost of debt: 6% Case II: Capital structure (corporate tax) Debt: $0 million EBIT: $40 million Tax rate: 50% Unlevered cost of capital: 10% 1) In Case I, when the debt-to-firm value (D/V) increases from 0% to 50%, i) Figure out the new cost of equity. (30points). ii) Figure out the old WACC with zero debt. Figure out the new WACC with debt of 50%. (30points). 2) In Case II, when the debt increases from $0 to $60mil., i) Figure out the levered firm's value. (30points) ii) Figure out the optimal capital structure. In other words, does the capital structure affect the WACC? (30points)
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Case I Capital Structure No Corporate Tax When the debttofirm value DV increases from 0 to 50 i Find out the new cost of equity you can use the follow... View the full answer
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ISBN: 9780137945139
5th Edition
Authors: Michael Sullivan
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