Donaldson Corporation has EBIT of $10m and interest expense of $2.5m every year in perpetuity. The firm's cost of debt is 5% and WACC is 8%. Its corporate tax rate is 20%. The only financing side effect is debt tax shield, i.e. there are no costs of financial distress.
(i) What is Donaldson's unlevered cash flow per year
(ii) What is Donaldson's levered cash flow per year
(iii) Based on the information given in the question and your answers in (i)-(ii) to find Donaldson's firm value using either the WACC approach or the APV approach.
(iv) Find Donaldson’s debt amount based on the information given above on cost of debt and interest expense.
(v) If Donaldson were an all-equity firm, what would be its cost of capital?