Assuming that there is an unlevered firm and a levered firm. The basic information is given by the following table.
Table1: Information of the firms
| Unlevered firm | Levered firm | |
| EBIT | 10000 | 10000 |
| Interest | 0 | 3200 |
| Taxable income | ||
| Tax (tax rate: 34%) | ||
| Net income | ||
| CFFA |
Assuming that cost of debt =8%; unlevered cost of capital =10%; systematic risk of the asset is 1.5
1 Fill in the blanks
2 What is the present value of the tax shield?3 What is the size of debt?
4 Calculate the following values:
a) value of unlevered firm; b) value of the levered firm; c) equity value; d) Cost of equity; e) cost of capital; f) systematic risk of the equity
5 Suppose that the firm changes its capital structure so that the debt-to-equity ratio is 1.0, then recalculate the systematic risk of the equity
