Individual assignment FIN251 Fall 2017 Due Dec 1, 2017 Assuming that there is an unlevered firm and a levered firm. The basic information is given by the following table Table1: Information of the firms Unlevered firm 5000 0 Levered firm 5000 500 EBIT Interest 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 1) 2) 3) 4) Fill in the blanks What is the present value of the tax shield? What is the size of 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 5 Suppose that the firm changes its capital structure so that the debt-to-equity ratio is 1.0, then recalculate the following values: a) Cost of equity b) cost of capital; c) systematic risk of the equity