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Find the value of unlevered and levered firms

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Assume the following data for two firms (U = unlevered firm) and (L = levered firm). Assume the two firms are in the same risk class when it comes to business risk. Both firms have EBIT = €1000 000. Firm U has zero debt and its required rate of return (KsU = 12%). Firm L has €2000 000 debt and pays 10% interest rate.

Based on the data provided, answer the following questions and show all your computations and interpret your results.

1. Find the value of unlevered (U) and levered (L) firms under zero corporate tax assumption.

2. Find the market value of the firm's L's debt and equity.

3. Estimate the cost of capital and the WACC for the unlevered firm.

4. Do 1 and 2 under the assumption of corporate tax = 60%.

Reference no: EM132555075

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