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Two firms Unlev and Lev differ only in their capital structure. Unlev has a market value of $20,000, with no

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Two firms Unlev and Lev differ only in their capital structure.  Unlev has a market value of $20,000, with no debt, whilst Lev has employed $11,000 in debt at the risk-free interest rate of 4% per annum.  The expected net operating income of both firms is $5,000 per annum in perpetuity, and the corporate tax rate is 30%.


 i)  Show that the market value of the equity of Lev is $12,300.


ii)  Calculate the equity holder's after-tax required rate of return for both firms.

Expert Answer:

Answer rating: 100% (QA)

To calculate the market value of the equity of Lev we need to subtract the value of debt from the ma View the full answer


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Related Book For  answer-question
Financial Reporting Financial Statement Analysis and Valuation a strategic perspective

Financial Reporting Financial Statement Analysis and Valuation a strategic perspective

ISBN: 978-1337614689

9th edition

Authors: James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

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Posted Date: June 12, 2023 06:00:25
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