We are given that the book value of assets is equal to the market value of

# We are given that the book value of assets is equal

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We are given that the book value of assets is equal to the market value of assets, so the value is \$3,000,000. Alternatively, we can calculate the value as the sum of the debt (which is zero) and the stock (200,000 shares at a price of \$15 per share): Subscribe to view the full document.

V = D + S = 0 + (\$15)(200,000) = \$3,000,000. Original cost of capital: WACC = w d r d (1-T) + w ce r s = 0 + (1.0)(10%) = 10%. With financial leverage (w d =30%): WACC = w d r d (1-T) + w ce r s = (0.3)(7%)(1-0.40) + (0.7)(11%) = 8.96%. Because growth is zero, FCF is equal to EBIT(1-T). The value of operations is: V op = FCF WACC = ( EBIT )( 1 T ) WACC = ( \$ 500 , 000 )( 1 0.40 ) 0.0896 = \$ 3 , 348 , 214.286. Increasing the financial leverage by adding \$900,000 of debt results in an increase in the firm’s value from \$3,000,000 to \$3,348,214.286. ( 6) a. Present situation (50% debt): WACC = w d r d (1-T) + w ce r s = (0.5)(10%)(1-0.15) + (0.5)(14%) = 11.25%. V = FCF WACC = ( EBIT )( 1 T ) WACC = ( \$ 13.24 )( 1 0.15 ) 0.1125 = \$100 million. 70 percent debt: WACC = w d r d (1-T) + w ce r s = (0.7)(12%)(1-0.15) + (0.3)(16%) = 11.94%. V = FCF WACC = ( EBIT )( 1 T ) WACC = ( \$ 13.24 )( 1 0.15 ) 0.1194 = \$94.255 million. 30 percent debt: WACC = w d r d (1-T) + w ce r s = (0.3)(8%)(1-0.15) + (0.7)(13%) = 11.14%. V = FCF WACC = ( EBIT )( 1 T ) WACC = ( \$ 13.24 )( 1 0.15 ) 0.1114 = \$101.023 million. ( 7) Subscribe to view the full document.

a. BEA’s unlevered beta is b U =b/(1+ (1-T)(D/S))=1.0/(1+(1-0.40)(.20/.80)) = 0.870. b. b = b U (1 + (1-T)(D/S)). At 40 percent debt: b L = 0.87 (1 + 0.6(40%/60%)) = 1.218. r S = 6 + 1.218(4) = 10.872% c. WACC = w d r d (1-T) + w ce r s = (0.4)(9%)(1-0.4) + (0.6)(10.872%) = 8.683%. V = FCF WACC = ( EBIT )( 1 T ) WACC = ( \$ 14 .933 )( 1 0.4 ) 0.08683 = \$103.188 million. • Fall '08
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