Assume that the WACC incorporating all costs and benefits of debt for Abracadabra Inc. is 15% and
Question:
Assume that the WACC incorporating all costs and benefits of debt for Abracadabra Inc. is 15% and the nominal free cash flow expected next year is $10,000. This free cash flow will grow at 9% forever. The cost of capital for the firm if it had no debt would be 16%. The tax rate is 30%. Moreover, Abracadabra has $50,000 in debt, pays $5,000 in interest expense each year, and has a stock. price of $5 per share and 25,000 shares outstanding.
A. Calculate the value of the levered firm.
B. Calculate the value of the unlevered firm.
C. Calculate the value of leverage to Abracadabra. Show what portion of this value is due to the debt tax shield.
Fundamentals of Corporate Finance
ISBN: 978-0133400694
1st canadian edition
Authors: Jonathan Berk, Peter DeMarzo, Jarrad Harford, David A. Stangeland, Andras Marosi