cost of equity / WACC

QUESTION

Consider the following information for an unlevered firm U:EBIT = $1,600 annuallyUnlevered value VU = $4,000Tax rate = 34%Cost of debt = 10%A levered firm L in the same business risk class has a debt/equity ratio of 1.Use the M&M Propositions to determine the:a. after-tax cost of equity for firm
Value of Unlevered firm = EBIT (1-tax rate) / Unlevered Cost of capital $4000 = 1600 * (1- 0.34) / Unlevered Cost of capital Unlevered Cost of capital = 26.4% After tax cost of equity = Unlevered Cost

of capital + Debt/Equity * ( Unlevered Cost of capital Cost of debt) (1-tax rate) = 0.264 + 1 * (0.264 0.10) * (1-0.34) = 37.22%

ANSWER:

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