fm17 11 - e. The maximum amount of debt financing is 100...

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e. The maximum amount of debt financing is 100 percent. At this level D = V, and hence V L = V U + TD = D $8,727,273 + 0.4D = D D - 0.4D = $8,727,273 0.6D = $8,727,273 D = $8,727,273/0.6 = $14,545,455 = V. Since the bondholders are bearing the same risk as the equity holders of the unlevered firm, r d is now 11 percent. Now, the total interest payment is $14,545,455(0.11) = $1.6 million, and the entire $1.6 million of EBIT would be paid out as interest. Thus, the investors (bondholders) would get $1.6 million per year, and it would be
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This note was uploaded on 07/13/2011 for the course FIN 4414 taught by Professor Staff during the Spring '08 term at University of Florida.

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