Problem:
VWX Corporation has an EBIT of $166,666.67, a corporate tax rate of 40%, debt of $500,000, and unlevered cost of capital of 20%. The cost of debt capital is 10%.
Required:
Question 1: What is the value of VWX's equity?
Question 2: What is the cost of equity capital for VWX?
Question 3: What is the WACC?
Question 4: Compare the WACC of VWX to the WACC of an unlevered firm. What is your conclusion? What principle have you proven in this case?
Note: Show all workings.