An un-levered firm, The Jedi Knights Company Ltd. has an EBIT of $450,000 that it expects it will earn forever and it pays all of its earnings as dividends to shareholders (ie. no growth). The Jedi Knights Company Ltd. has 287,234 shares issued and outstanding. 

Now assume a world of taxes, a cost for the risk of default.

1. What is the value of this all equity firm and what is the WACC for the company if the tax rate is 40% and the company's beta is 0.90? 

2. What is the value of the firm if the firm issues $100,000 of 6% bonds and what is the WACC for the firm? Additional information is included in the schedule below.

 

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EBIT Un-levered ke Tax Rate T-bill rate TSX 450,000 9.4% 40% 4% 10% Stock's Beta Kb 6.0% 0.90000 100,000 6.0% 0.91209 200,000 6.5% 0.92471 300,000 7.0% 0.93789 400,000 7.5% 0.95167 500,000 9.0% 0.96609 600,000 10.5% 0.98120 700,000 12.0% 0.99705 800,000 13.5% 1.01370 Value of Debt EBIT Un-levered ke Tax Rate T-bill rate TSX 450,000 9.4% 40% 4% 10% Stock's Beta Kb 6.0% 0.90000 100,000 6.0% 0.91209 200,000 6.5% 0.92471 300,000 7.0% 0.93789 400,000 7.5% 0.95167 500,000 9.0% 0.96609 600,000 10.5% 0.98120 700,000 12.0% 0.99705 800,000 13.5% 1.01370 Value of Debt

Answer rating: 100% (QA)

1 To find the value of the allequity firm we can use the formula Value of Firm EBIT unlevered ke Val... View the full answer