Reference no: EM132714331
Echelon Limited has an EBIT of $500,000. The firm has a corporate tax rate of 40% and has an un-levered beta of .85. The firm has 110,000 common shares issued and outstanding. In the market, you observe that Government T-bills are being sold to yield 3% and the S&P/TSX Composite Index is expected to yield 12%. Assume a world of taxes and a cost for the risk of default. All general M&M assumptions apply.
a) Calculate the value of the firm.
b) Calculate the WACC for the firm.
c) What is the value of a share in the company and what is the EPS?
d) What is the value of the firm if the firm issues $800,000 of bonds at par with a coupon rate of 5.5%? The beta for the equity of the leveraged firm is .98.
e) What is the value of the firm if the firm issues $900,000 of bonds at par with a coupon rate of 8.5%? The beta for the equity of the leveraged firm is 1.25.
f) What is the optimal level of debt $0, $800,000 or $900,000? Explain.
g) What is the WACC for the firm at the optimal level of debt?
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