The Teenie Tiny Company is currently an un-levered firm with a beta of 1.3925. Since this is
Question:
The Teenie Tiny Company is currently an un-levered firm with a beta of 1.3925. Since this is a start-up company with significant impact on the social well-being of the country, the firm was given a tax-exempt status for the first five years of operation. In the market, you observe that the latest Government of Canada T-bill issue is yielding 3% and the market risk premium is 8%.
Assume that there is no cost for the risk of default (all debt will be issued with a 5% coupon interest rate.
Calculate the required rate of return for the un-levered firm. (2 marks)
Calculate the market value of the firm using proposition I. (2 marks)
Calculate the WACC for the firm using proposition II. (1 mark)
If the firm issues $750,000 in debt, calculate the total value of the firm,cost of equity, and the WACC (8 marks)
If the firm issues $2,000,000 in debt, calculate the total value of the firm,cost of equity, and the WACC (8 marks)
Graph the results of your calculations. (2 marks)
Fundamentals of Corporate Finance
ISBN: 978-0077861629
8th edition
Authors: Richard Brealey, Stewart Myers, Alan Marcus