Question: 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

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.

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