Using M&M Model Propositions 1 & 2

Value of Debt Beta 1.392500 1.483015 1.542274 1.607016 1.678038 1.756303 1.842075 1.939488 2.047619 01 5.0% 5.5% 6% 6.5% 7.0% 9.0% 11.0% 13.0% 15.0% EBIT Tax Rate T-bill Rate TSX 800,000 40% 3.0% 11.0% 250,000 500,000 750,000 1,000,000 1,250,000 1,500,000 1,750,000 2,000,000 | | | (31 marks) a) Calculate the required rate of return for the un-levered firm. (2 marks) b) Calculate the market value of the un-levered firm in proposition I. (2 marks) c) Calculate the WACC for an un-levered firm in proposition I. (1 mark) d) Using the information from the table, calculate the value of the firm (proposition I), cost of equity, and the WACC (proposition II) each level of debt. (16 marks) e) Calculate the present value of distress. (4 marks) f) Graph (on 2 separate graphs) the information for proposition I and proposition Il. (4 marks) g) Briefly explain the amount of debt company should use as a levered company. (2 marks)