Question: Exercise 2A Easteros Inc., an unlevered firm, has expected earnings before interest and taxes of $2 million per year. Easteros's tax rate is 40%, and

Exercise 2A

Easteros Inc., an unlevered firm, has expected earnings before interest and taxes of $2 million per year. Easteros's tax rate is 40%, and the market value is $12 million. The stock has a of 1 , and the risk free rate is 9%. The risk premium is 6%. Management is considering the use of perpetual debt (the size of the firm would remain constant). The default free interest rate on debt is 12% What is the cost of equity, WACC and the value of Easteros before the debt is issued? Maximum marks: 5 Easteros Inc., an unlevered firm, has expected earnings before interest and taxes of $2 million per year. Easteros's tax rate is 40%, and the market value is $12 million. The stock has a of 1 , and the risk free rate is 9%. The risk premium is 6%. Management is considering the use of perpetual debt (the size of the firm would remain constant). The default free interest rate on debt is 12% What is the cost of equity, WACC and the value of Easteros before the debt is issued? Maximum marks: 5

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