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Company B will not pay any dividend one year from now. The equity value will be...

Company B will not pay any dividend one year from now. The equity value will be equal to 30,000,000 with probability 0.3 and 60,000,000 with probability 0.7. The zero-coupon debt of the firm will have one year from now a value of 23,467,500. The expected return on debt is 5.00% and the expected return on equity is 9.45%. Assuming that the corporate tax rate is 24%, what is the unlevered return on equity?

A. 7.34%
B. 8.01%
C. 9.45%
D. 10.34%

The correct answer is B
(Thumb up for correct step-by-step solution. Many thanks)

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Answer #1

Expected value of equity Return Net income Net income before tax Interest cost EBIT Tax @ 24% Net unlevered return 51000000 9.45% 4819500 6341447.368 1543914.474 7885361.842 1892486.842 5992875 4 10 12 13 Value of equity Unlevered return 74467500.00 8.05%Expected value of equity Return Net income Net income before tax Interest cost EBIT Tax @ 24% Net unlevered return (30000000 0.3+60000000*0.7) 0.0945 4 -D5/0.76 -23467500(5%/076) -D6+D7 -D8 0.24 D8-D9 12 13 Value of equity Unlevered return D3+23467500 -D10/D12

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