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Chapter 16 Financial Leverage & Capital Structure KHAPTER 16 PROBLEM SET: 1. WLTD has a DfE = 1.5. Its WACC =8.4% and cost of debt is 5.9%. The corporate tax rate = 35%. (25 pts) a. What is the cost of equity capital? b. What is the unlevered cost of equity capital? c. What would the cost of equity be if the D/E = 2.0; DIE = 1.0; D/E = 0? 2. Jetson Space Co. expects EBIT to be $23,500 every year in perpetuity. The company currently has no debt and its cost of unlevered equity is 15%. (25 pts) a. What is the current value of the Company? b. Suppose Jetson Space can borrow at a rate of 10% and has a corporate tax rate = 35%. What will the value of the rm be if the company takes on debt equal 50% of its unlevered value? 3. WResearch Co. expects EBIT to be $83,000 a year in perpetuity. The rm can borrow at 8%; has no debt and its cost of unlevered equity capital is 13%. a. Ifthe tax rate is 35%, what is the value of the rm? (25 pts) b. What will be value of the rm be if it borrows $125,000 and uses the proceeds to repurchase shares? c. What is the value of the equity of the levered rm? 4. Binford Tools has an expected EBIT = $67,000 in perpetuity and a tax rate = 35%. The rm has $139,000 in outstanding debt at an interest rate = 6.85%. Its unlevered cost of capital is 102596. What is the value of the rm according to M&M Proposition 1 with taxes? (25 pts)