Quiz 2, Spring 2018 Financial Management (BUSS207) Student ID: Name 1. An unleve

Question

Quiz 2, Spring 2018 Financial Management (BUSS207) Student ID: Name 1. An unlevered firm has a cost of capital of 17.5 percent and earnings before interest and taxes of $327,500. A levered firm with th a book value and a face value of debt of $650,000 with a 7.5 percent annual coupon. The applicable tax rate is 38 percent. What is the value of the levered firm? e same operations and assets has both 2. Country Markets has an unlevered cost of capital of 12 percent, a tax rate of 38 percent, and expected earnings before interest and taxes of $15,700. The company has $11,000 in bonds outstanding that have a 6 percent coupon and pay interest annually. The bonds are selling at par value. What is the cost of equity? ???? 3.D. L. Tuckers has $21,000 of debt outstanding that is selling at par and has a coupon rate of 7.5 percent. The tax rate is 32 percent. What is the amount of the annual interest tax shield? What is the present value of the tax shield?

Explanation / Answer

1)value of levered=value of unlevered+(debt*tax)
Value of unlevered=EBIT*(1-tax)/cost of capital
=327500*(1-38%)/17.5%
=1160285.71
value o funlevered=1160285.71+(650000*38%)
=1407285.71

2)value of unlevered=15700*(1-38%)/12%=81116.67
Value of levered=81116.67+(11000*38%)=85296.67
Value of equity=85296.67-11000=74296.67
Cost of equity= 12%+(12%-6%)*11000/74296.67)*(1038%))
=12.55%

3) tax shield= (tax*rate of debt*debt)
=(32%*21000*7.5%)
=504

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