Assume a firm’s cost of capital with zero debt is 0.15 and the cost of debt is 0.08. The value of the unlevered firm is Vu = (150,000/0.15)= $1,000,000
Where, $150,000 is the expected after-tax earnings, with zero debt. If $500,000 of debt is substituted for stock -
(a) Determine the value of the firm (no cost of financial distress and no investor taxes). The corporate tax rate is 0.35.
(b) Determine the value of the outstanding stock after the debt issuance.
(c) Determine the cost of equity after the debt issuance.
(d) Determine the weighted average cost of capital with the debt.
(e) Using the FCF method, compute the firm’s present value.
(f) Compute he firm’s present value using the APV method.