Cost of capital and value of the firm

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The X firm is currently financed with 100% equity and the cost of equity for this unlevered firm is 10%. Suppose the cost of debt is 4% (before tax) and its earnings before interest and taxes is $4000. X firm is considering employing 28% debt and 72% equity. Mr. X, the owner of X, believes that the capital market is perfect as assumed in Modigliani-Miller with no tax model. Please show using calculations for cost of capital and value of the firm to Mr. X that the cost of capital (WACC) and market value for levered firm and unlevered with its current EBIT is the same. Assume X firm's earnings has zero growth.

Reference no: EM132395228

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