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 firmtax rate)/(1+cost of debt) PV of tax shield 1007.41 value of levered firm/cost of debt 3) Size of debt 40000 4) a) EBIT(1-T)/cost of capital Value of unlevered firm 66000 b) value of unlevered firm+Taxsize of debt Value of levered firm 79600 c) total value of unlevered firm-debt Equity value 39600 d) cost of equity cost of capital+(debt/equity)(cost of capital-cost of debt) cost of equity 12.02% e) wacc formula equity/value of levered firmcost of equity+debt/value of levereed firmcost of debt(1-T) cost of capital (levered) 8.63% f) systematic risk of asset(1+((1-T)*(debt/equity))) systematic risk of equity 2.5 Hi I really need help with question 5! Thank you so much! 5. Suppose that the firm changes its capital structure so that the debt-to-equity ratio is 1.0, then recalculate the systematic risk of the equity

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

4)
a)		EBIT(1-T)/cost of capital
	Value of unlevered firm	66000

b)		value of unlevered firm+Tax*size of debt
	Value of levered firm	79600

c)		total value of unlevered firm-debt
	Equity value	39600

d)	cost of equity	cost of capital+(debt/equity)(cost of capital-cost of debt)
	cost of equity	12.02%

e)		wacc formula
		equity/value of levered firmcost of equity+debt/value of levereed firmcost of debt*(1-T)
	cost of capital (levered)	8.63%

f)		systematic risk of asset(1+((1-T)(debt/equity)))
	systematic risk of equity	2.5

Hi I really need help with question 5! Thank you so much!

5. Suppose that the firm changes its capital structure so that the debt-to-equity ratio is 1.0, then recalculate the systematic risk of the equity

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