What is the present value of the tax shield?3 What is the size of debt? – Essaylink

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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

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