Consider a firm that lasts 5 years and earns revenues of $800K per year (year 1-

ID: 2645917 • Letter: C

Question

Consider a firm that lasts 5 years and earns revenues of $800K per year (year 1-5)after an initial investment of $1000K in year 0.

a) With straight line depreciation and a tax rate of 10%, compute the taxes paid by the firm in years 1-5.

b) Assume that the firm carries no debt, and faces a cost of equity of 10%.

What is the unlevered value of the firm?

c) Suppose that the firm issues 5 year debt with face value of $500K thatcarries a coupon rate of 10%. If the yield to maturity on debt is 4%, what

is the value of the levered firm?

d) Given the information in c), what must be the market value of equity?

Having trouble with this. Could you please help and show your work. Thank you so much.

a. the depreciation value is $200 per year and at 10% tax, the total deduction is $800- (200+60)= $540.

b. value if the firm= 800*10=$8,000

c. market value of debt= 500*10= $5,000+$2500= $7500

d. the market value of the equity is $2500

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