How do I do this problem? What is the approach and answers? Case I: Capital stru

Question

How do I do this problem? What is the approach and answers?

Case I: Capital structure theory (no tax)

Case II: Capital structure theory (corporate tax)

EBIT : $33 million

Cost of equity : 14%

Debt-to-Firm value : 50%

Cost of debt : 10%

EBIT : $33 million

Tax rate : 40%

Cost of debt : 10%

Unlevered cost of capital : 12%

How do I do this problem? What is the approach and answers?

Case I: Capital structure theory (no tax)

Case II: Capital structure theory (corporate tax)

EBIT : $33 million

Cost of equity : 14%

Debt-to-Firm value : 50%

Cost of debt : 10%

EBIT : $33 million

Tax rate : 40%

Cost of debt : 10%

Unlevered cost of capital : 12%

Explanation / Answer

WACC= 0.5*14+0.5*10 = 12%

Firm value= 33/0.12 = $275million

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