fm17 9 - 17-9 a. VU = SU = EBIT $1,600,000 = = $14,545,455....

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Unformatted text preview: 17-9 a. VU = SU = EBIT $1,600,000 = = $14,545,455. rsU 0.11 VL = VU = $14,545,455. b. At D = $0: rs = 11.0%; WACC = 11.0% At D = $6 million: rsL = rsU + (rsU – rd)(D/S) ⎛ $6,000,000 ⎞ = 11% + (11% - 6%) ⎜ ⎟ = 11% + 3.51% = 14.51%. ⎝ $8,545,455 ⎠ WACC = (D/V)rd + (S/V)rs ⎛ $8,545,455 ⎞ ⎛ $6,000,000 ⎞ =⎜ ⎟ 14.51% ⎟ 6% + ⎜ ⎝ $14,545,455 ⎠ ⎝ $14,545,455 ⎠ = 11.0%. At D = $10 million: ⎛ $10,000,000 ⎞ rsL = 11% + 5% ⎜ ⎟ = 22.00%. ⎝ $4,545,455 ⎠ ⎛ $10,000,000 ⎞ ⎛ $4,545,455 ⎞ WACC = ⎜ ⎟ 6% + ⎜ ⎟ 22% ⎝ $14,545,455 ⎠ ⎝ $14,545,455 ⎠ = 11.0%. Leverage has no effect on firm value, which is a constant $14,545,455 since WACC is a constant 11%. This is because the cost of equity is increasing with leverage, and this increase exactly offsets the advantage of using lower cost debt financing. c. VU = [(EBIT - I)(1 - T)]/rsU = [($1,600,000 - 0)(0.6)]/0.11 = $8,727,273. VL = VU + TD = $8,727,273 + 0.4($6,000,000) = $11,127,273 Answers and Solutions: 17 - 9 ...
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