Answer to Requirement 1:
Value of Unlevered Firm = EBIT * (1 - Tax Rate) / Cost of
Equity
Value of Unlevered Firm = $19,750 * (1 - 0.35) / 0.15
Value of Unlevered Firm = $12,837.50 / 0.15
Value of Unlevered Firm = $85,583.33
Answer to Requirement 2-a:
Value of Debt = 50% * Value of Unlevered Firm
Value of Debt = 50% * $85,583.33
Value of Debt = $42,791.665
Value of Levered Firm = Value of Unlevered Firm + Tax Rate *
Value of Debt
Value of Levered Firm = $85,583.33 + 0.35 * $42,791.665
Value of Levered Firm = $85,583.33 + $14,977.08
Value of Levered Firm = $100,560.41
Answer to Requirement 2-b:
Value of Debt = 100% * Value of Unlevered Firm
Value of Debt = 100% * $85,583.33
Value of Debt = $85,583.33
Value of Levered Firm = Value of Unlevered Firm + Tax Rate *
Value of Debt
Value of Levered Firm = $85,583.33 + 0.35 * $85,583.33
Value of Levered Firm = $85,583.33 + $29,954.17
Value of Levered Firm = $115,537.50
Answer to Requirement 3-a:
Value of Debt = 50% * Value of Unlevered Firm
Value of Levered Firm = Value of Unlevered Firm + Tax Rate *
Value of Debt
Value of Levered Firm = $85,583.33 + 0.35 * 0.50 * Value of
Unlevered Firm
Value of Levered Firm = $85,583.33 + 0.1750 * Value of Unlevered
Firm
0.8250 * Value of Unlevered Firm = $85,583.33
Value of Levered Firm = $103,737.37
Answer to Requirement 3-b:
Value of Debt = 100% * Value of Unlevered Firm
Value of Levered Firm = Value of Unlevered Firm + Tax Rate *
Value of Debt
Value of Levered Firm = $85,583.33 + 0.35 * 1.00 * Value of
Unlevered Firm
Value of Levered Firm = $85,583.33 + 0.35 * Value of Unlevered
Firm
0.65 * Value of Unlevered Firm = $85,583.33
Value of Levered Firm = $131,666.66
Letang Corporation expects an EBIT of $19.750 every year forever. The company currently has no debt,...
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