Homework Answers
EBIT. = 500,000
(-) interest (1,200,000 × 10%) = (120,000)
EBT= 380,000
(-) taxes (50%) = (190,000)
EAT = 190,000
Market value of equity = EAT/ cost of equity
= 190,000 / 0.14
= $1,357,142.857
A) value of firm= market value of equity + market value of debt
= 1,357,142.857 + 1,200,000
= $2,557,142.857
B) overall cost of capital= interest + EAT/ value of firm
= 120,000 + 190,000 / 2,557,142.857
= 310,000 / 2,557,142.857
= 12.12%
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