1. An unlevered firm has a cost of capital of 15% and earnings before interest and taxes of $128025. A levered firm with the same operations and assets has both a book value and a face value of debt of $764245 with a 9% annual coupon. The applicable tax rate is 35%.
What is the value of the levered firm? (Round answer to 0 decimal places, do not round intermediate calculations)
2. The Backwoods Lumber Co. has a debt-equity ratio of 0.67. The firm's required return on assets is 11% and its cost of equity is 15%.
What is the pre-tax cost of debt based on MM Proposition II with no taxes? (Answer in percentage terms. Round answer to 2 decimal places, do not round intermediate calculations)