Let’s compare the payoffs of two different capital structures for the same firm.

One is unlevered; and the other is levered and has $8,000 in debt with 8% interest. The corporate tax rate is assumed to be 35%. The unlevered firm has 400 shares. The price per share of the unlevered firm is $32.50. The return on equity for the unlevered firm is 10%.

(a) What should the price per share be of the levered firm and how many shares does the levered firm have outstanding?

(b) At what value of EBIT, would the EPS [earnings per share] be the same for the unlevered and levered firm?

Answer rating: 100% (QA)

Answers levered firn unlevered firm Debt 8000 Rate of ... View the full answer