Assuming that there is an unlevered firm and a levered firm. The basic information is given by the following table.

 

Table1: Information on the firms

	Unlevered firm	Levered firm
EBIT	10000	10000
Interest	0	3200
Taxable income
Tax (tax rate: 34%)
Net income
CFFA

 

Assuming that cost of debt =8%; unlevered cost of capital =10%; systematic risk of the asset is 1.5

• Fill in the blanks
• What is the present value of the tax shield?
• What is the size of the debt?
• Calculate the following values:
  a) value of unlevered firm; b) value of the levered firm; c) equity value; d) Cost of equity; e) cost of capital; f) systematic risk of the equity
• Suppose that the firm changes its capital structure so that the debt-to-equity ratio is 1.0, then recalculate the systematic risk of the equity
• Based on the results of a question (4), if there are the following two mutually exclusive projects. What is the crossover required rate of return for the two projects?
• Based on the previous discussions, are you going to accept projects A or B? Why?

Answer rating: 100% (QA)

What is the present value of the tax shield The present value of the tax shield is 3200 034 1 08 544 ... View the full answer