Problem 2 (25 marks) This is the last year for the companys tax exempt status Assuming that the tax rate will be 40 and that there is no cost for the risk of default Use the following table to answer these questions Value of Debt R D Beta EBIT 800,000 0 5 0 1 392500 Tax Rate 40 250,000 5 0 1 483015 T bill Rate 3 0 500,000 5 0 1 542274 TSX 11 0 750,000 5 0 1 607016 1,000,000 5 0 1 678038 1,250,000 5 0 1 756303 1,500,000 5 0 1 842075 1,750,000 5 0 1 939488 2,000,000 5 0 2 047619 Calculate the required rate of return for the un levered firm (2 marks) Calculate the market value of the un levered firm in proposition I (2 marks) Calculate the WACC for an un levered firm in proposition II No calculation required (1 mark) Using the information from the table, calculate the value of the firm (proposition I), cost of equity, and the WACC (proposition II) of the firm for each level of debt (16 marks) Using the information from your calculations draw the graphs for proposition I and proposition II (4 marks)

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Question: Problem 2 (25 marks) This is the last year for the companys tax-exempt status. Assuming that the tax rate will be 40% and that there

Problem 2 (25 marks)

This is the last year for the companys tax-exempt status. Assuming that the tax rate will be 40% and that there is no cost for the risk of default. Use the following table to answer these questions:

		Value of Debt	R_D	Beta
EBIT	800,000	0	5.0%	1.392500
Tax Rate	40%	250,000	5.0%	1.483015
T-bill Rate	3.0%	500,000	5.0%	1.542274
TSX	11.0%	750,000	5.0%	1.607016
		1,000,000	5.0%	1.678038
		1,250,000	5.0%	1.756303
		1,500,000	5.0%	1.842075
		1,750,000	5.0%	1.939488
		2,000,000	5.0%	2.047619

Calculate the required rate of return for the un-levered firm. (2 marks)
Calculate the market value of the un-levered firm in proposition I. (2 marks)
Calculate the WACC for an un-levered firm in proposition II. No calculation required (1 mark)
Using the information from the table, calculate the value of the firm (proposition I), cost of equity, and the WACC (proposition II) of the firm for each level of debt. (16 marks)
Using the information from your calculations draw the graphs for proposition I and proposition II. (4 marks)

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