THE BELOW INFORMATION WAS ALL THAT WAS GIVEN. Please show work and highlight answer. PLEASE COMPLETE THE LAST 4 PARTS (5-8) THAT ARE BOLDED WITHOUT ANSWERS, [1-4 have already been answered], AS IT IS A COMPOUNDING QUESTION and as part of Chegg's guidelines, compounding questions must be answered up to 4 parts.

Given:

Assume no bankruptcy. Consider the following information of a firm:

Market value of equity, E = $100 billion.

Total Firm value is $120 billion

WACC = 10%

Cost of debt, RD = 1.5%

Tax rate TC = 21%

Also assume that the market expected return = 12%

In all of the following answers, round to two decimal (e.g., 1.23). For those requiring a percentage answer, input 11.11 if your answer is 11.11%, WITHOUT the % in your typed answer.

1. What is the present value of tax shield ___ billion.

   1. Total firm value = market value of equity + market value of debt

   2. So, market value of debt = 120 billion - 100 billion = 20 billion

   3. Present value of tax shield = value of debt* tax rate = 20 billion * 21% = 4.20 billion

2. What is the value of the unlevered firm (zero debt but same assets) ___ billion.

   1. Value of unlevered firm = Value of levered firm - present value of tax shield = 120 billion - 4.2 billion = 115.80 billion

3. What is the cost of capital for an unlevered firm ___ %.

   1. We know:

   2. WACC = REL * We + Rp*Wd*(1 Tac rate...................(1)

   3. WACC= 10%

   4. R_{EL} = Cost of levered equity

   5. We = weight of equity = 100/120 = 83.33%

   6. RI = cost of debt = 1.5%

   7. Wd = weight of debt = 1- 83.33% = 16.67%

   8. So, W ACC = 10% = REL* 83.33% + 1.5% * 16.67% *(1-21%)

   9. So, REL *83.33% 10% 1.5% * 16.67%* (1 21%) = 9.80%

   10. So, R_{EL} = 9.80%/83.33% = 11.76

   11. Now, from the MM proposition we know:

   12. REL = REU + D/E) *(1-TC) * (REU [) RD.....................(2)

   13. R_{EU}= cost of unlevered equity

   14. R_{EL} = cost of levered equity = 11.76%

   15. To = tax rate = 21%

   16. D/E = debt to equity ratio = 20/100 = 20%

   17. RI = cost of debt = 1.5%

   18. From (2) we get:

   19. 11.76% = REU + 20%* (1 21%) * (REU 1.5%

   20. Or, 11.76% = REU + 0.158 * (REU 1.5%)

   21. Or, 11.76% = R_{EU} + 0.158* R_{EU} - 0.24%

   22. Or, 1.158 * REU = 11.76% +0.24% 12.00%

   23. Or, R_{EU} = 12.00%/1.158 = 10.36%

   24. Cost of unlevered firm = 10.36

4. What is the beta for the unlevered firm?

   1. From CAPM model:

   2. REU = RF + beta * (RM RF)..........................(3)

   3. R_{EU} = 10.36%

   4. R_F = 1.5% (we assume for simplicity the risk-free return is the cost of debt)

   5. R_M = 12%

   6. from (3) we get

   7. 10.36% = 1.5% + beta*(12%-1.5%)

   8. Or, beta*(12%-1.5%) = 10.36%-1.5% = 8.86%

   9. Or, beta * 10.50% = 8.86%

   10. Or, beta = 8.86%/10.50% = 0.84

   11. Beta of unlevered firm = 0.84

Suppose the firm can issue 10 billion more debt at the current rate and use the proceeds to buy back equity.

5. What is the new equity beta

6. What is the new equity value? ___ billion

7. What is the new firm value? ___ billion

8. What is the new WACC? ___ %

THE ABOVE INFORMATION WAS ALL THAT WAS GIVEN. Please show work and highlight answer. PLEASE COMPLETE THE LAST 4 PARTS (5-8) THAT ARE BOLDED WITHOUT ANSWERS, [1-4 have already been answered], AS IT IS A COMPOUNDING QUESTION and as part of Chegg's guidelines, compounding questions must be answered up to 4 parts.