cost of debt8% unlevered cost of capital10% systematic risk of asset1.5 1) Unlevered FirmLevered Firm EBIT1000010000 Interest03200 Taxable Income100006800 34%Tax 34002312 Net Income66004488 CFFA0-3200 2)PV of the tax shield? Value of levered firm3200 tax rate34% (value of levered firm*tax rate)/(1+cost of debt) PV of tax shield1007.41 value of levered firm/cost of debt 3)Size of debt40000 Hi I really need help with question 4 based on the above information Thank you!Assuming that cost of debt =8%; unlevered cost of capital =10%; systematic risk of the asset is 1.51. Fill in the blanks2. What is the present value of the tax shield?3. What is the size of debt?4. Calculate the following values:a) value of unlevered firm; b) value of the levered firm; c) equity value; d) Cost of equity; e) cost of capital; f) systematic risk of the equity

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Answered: cost of debt 8% unlevered cost…

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter17: Dynamic Capital Structures And Corporate Valuation

Section: Chapter Questions

Problem 7P

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Question

100%

cost of debt	8%
unlevered cost of capital	10%
systematic risk of asset	1.5
1)
		Unlevered Firm	Levered Firm
	EBIT	10000	10000
	Interest	0	3200
	Taxable Income	10000	6800
34%	Tax	3400	2312
	Net Income	6600	4488
	CFFA	0	-3200

2)	PV of the tax shield?

	Value of levered firm	3200
	tax rate	34%
		(value of levered firm*tax rate)/(1+cost of debt)
	PV of tax shield	1007.41

		value of levered firm/cost of debt
3)	Size of debt	40000

Hi I really need help with question 4 based on the above information Thank you!

Assuming that cost of debt =8%; unlevered cost of capital =10%; systematic risk of the asset is 1.5

1. Fill in the blanks

2. What is the present value of the tax shield?

3. What is the size of debt?

4. Calculate the following values:
a) value of unlevered firm; b) value of the levered firm; c) equity value; d) Cost of equity; e) cost of capital; f) systematic risk of the equity

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