chapter 16

just put number in yellow box and get the answer in blue box :))
by lu'lu' nafiati

1 RE=RU+(RU-RD)*(D/E)*(1-Tc)
D/E=(RE-Ru)/{(Ru-RD)*(1-Tc)
pretax cost of debt (D) 8.40%
unleverd cost of capital (Ru) 14.60%
tax rate (Tc) 37.00%
cost of equity (RE) 18.00%

debt equity ratio (D/E) 0.87

2 VL=Vu+(Tc*D)={(EBIT*(1-Tc)}/Ru+(Tc*D)
equity=value of the levered firm-bonds outstanding
RE=RU+(Ru-RD)*(D/E)*(1-Tc)
unlevered cost of capital (Ru) 10.00%
tax rate (Tc) 34.00%
ebit 1600
bonds outstanding (D) 2700
coupon rate 6.00%

Value of the levered firm (VL) 11478

equity (E) 8778
cost of equity (RE) 10.81%

3 VL=Vu+(Tc*D)={(EBIT*(1-Tc)}/Ru+(Tc*D)
equity=value of the levered firm-bonds outstanding
RE=RU+(Ru-RD)*(D/E)*(1-Tc)
WACC=(E/VL)*RE+(D/VL)*coupon rate*(1-Tc)
unlevered cost of capital (Ru) 14.00%
tax rate (Tc) 35.00%
ebit 1,900
bonds outstanding (D) 3,200
coupon rate 6.00%

Value of the levered firm (VL) 9941.43

equity (E) 6741.43
cost of equity (RE) 16.47%

WACC 12.42%

4 VL=Vu+(Tc*D)={(EBIT*(1-Tc)}/Ru+(Tc*D)
unlevered cost of capital (Ru) 14.00%
tax rate (Tc) 33.00%
ebit 2,200
bonds outstanding (D) 2,900
coupon rate 7.00%

Value of the levered firm (VL)11,485.57

5 EBIT/shares outst 1=(EBIT-interest rate*debt)/shares outst2

EBIT BEP=(intrst rate*debt*outst shrs 1)/(outs shrs 1-outs shrs 2)
option 1
shares outstanding 29,000

option 2
shares outstanding 17,000
debt 270,000
interest rate 8.00%

BEP 52,200.00
outstanding

outstanding
 *debt)/shares outst2
1)/(outs shrs 1-outs shrs 2)
 1
Bob's Warehouse has a pre-tax cost of debt of 8.4 percent and an unlevered cost of capital of 14.6 pe
0.76
0.82
0.79
0.87
0.72

2
Johnson Tire Distributors has an unlevered cost of capital of 11 percent, a tax rate of 34 percent, and
8.27 percent
11.81 percent
9.45 percent
10.63 percent
7.08 percent

3
Jemisen's firm has expected earnings before interest and taxes of $1,900. Its unlevered cost of capita
11.82 percent
10.97 percent
11.14 percent
11.44 percent
10.91 percent

4
L.A. Clothing has expected earnings before interest and taxes of $2,000, an unlevered cost of capital
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5
Kelso Electric is debating between a leveraged and an unleveraged capital structure. The all equity ca
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d cost of capital of 14.6 percent. The firm's tax rate is 37 percent and the cost of equity is 18 percent. What is t

ax rate of 34 percent, and expected earnings before interest and taxes of $1,400. The company has $2,700 in b

ts unlevered cost of capital is 12 percent and its tax rate is 33 percent. The firm has debt with both a book and

unlevered cost of capital of 11 percent and a tax rate of 34 percent. The company also has $2,900 of debt that

structure. The all equity capital structure would consist of 27,000 shares of stock. The debt and equity option w
uity is 18 percent. What is the firm's debt-equity ratio?

he company has $2,700 in bonds outstanding that have an 8 percent coupon and pay interest annually. The bo

s debt with both a book and a face value of $3,200. This debt has an 8 percent coupon and pays interest annua

also has $2,900 of debt that carries a 7 percent coupon. The debt is selling at par value. What is the value of th

he debt and equity option would consist of 15,000 shares of stock plus $250,000 of debt with an interest rate o
ay interest annually. The bonds are selling at par value. What is the cost of equity?

pon and pays interest annually. What is the firm's weighted average cost of capital?

value. What is the value of this firm?

debt with an interest rate of 6 percent. What is the break-even level of earnings before interest and taxes betw
efore interest and taxes between these two options? Ignore taxes.