The Philly Cheese Corporation is a firm financed with $200M perpetual debt and $290M of equity. The expected return on the debt is 5%. Firms in the same industry that are all-equity financed have an expected return of 10%. The corporate tax rate is 42%. Assume that Philly Cheese has only one current project which generates perpetual annual earnings before taxes and interest of X.

(a) What is X?

(b) What is the current expected return on the equity of the firm?

(c) What is the weighted average cost of capital of the firm?

Answer rating: 100% (QA)

Solutions a Finding X Earnings before taxes and interest 1 We know the expected return on equity for ... View the full answer