Need questions 1-7 answered including 4 a,b,c,d,e,fAssuming that there is an unlevered firm and a levered firm. The basic information is given by the following table. Table1: Information of the firms Unlevered firmLevered firmEBIT1000010000Interest03200Taxable income Tax (tax rate: 34%) Net income CFFA Assuming that cost of debt =8%; unlevered cost of capital =10%; systematic risk of the asset is 1.5Fill in the blanksWhat is the present value of the tax shield?What is the size of debt?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 equitySuppose that the firm changes its capital structure so that the debt-to-equity ratio is 1.0, then recalculate the systematic risk of the equityBased on the results of question (4), if there are the following two mutually exclusive projects. What is the crossover required rate of return for the two projects?Based on the previous discussions, are you going to accept project A or B? Why?

Hey, since there are multiple subparts questions posted, we will answer first three question. If you…

Answered: Need questions 1-7 answered including 4…

SWFT Essntl Tax Individ/Bus Entities 2020

23rd Edition

ISBN:9780357391266

Author:Nellen

Publisher:Nellen

Chapter3: Taxes On The Financial Statements

Section: Chapter Questions

Problem 5RP

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Need questions 1-7 answered including 4 a,b,c,d,e,f

Assuming that there is an unlevered firm and a levered firm. The basic information is given by the following table.

Table1: Information of the firms

	Unlevered firm	Levered firm
EBIT	10000	10000
Interest	0	3200
Taxable income
Tax (tax rate: 34%)
Net income
CFFA

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

Fill in the blanks
What is the present value of the tax shield?
What is the size of debt?
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
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
Based on the results of question (4), if there are the following two mutually exclusive projects. What is the crossover required rate of return for the two projects?
Based on the previous discussions, are you going to accept project A or B? Why?

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