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Brand Corp. is currently unlevered. The firm has $960,000 in earnings before interest and taxes (EBIT)...

  1. Brand Corp. is currently unlevered. The firm has $960,000 in earnings before interest and taxes (EBIT) and the unlevered cost of capital is 12%. The firm wants to issue $1,600,000 in debt to repurchase stock. The perpetual bonds have a 5% yield. The tax rate is 25%.
  1. Find the value of the levered firm (Vl).
  2. For the levered firm, find the cost of equity.   

Unless stated otherwise, compounding is annual and payments occur at the end of the period.

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Answer #1

Value of Unleavered (EBIT*(1-Tax rate)/Unleavered Cost of Capital (960000*(1-0.25)/0.12 $ 6,000,000.00 Value of leavered firm

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