How does the cost of equity change

Reference no: EM133291100

Question 1:

NSP is a publicly traded company with a D/E ratio of 0.7. The cost of debt for NSP is 6%, and the unlevered beta is 0.9. The yield to maturity of T-Bills is 3% and the market risk premium is 7%.

a) What is the cost of equity of the levered firm? Assume all M&M general assumptions hold.

b) How does the cost of equity change if we impose a 30% corporate tax while the unlevered beta remains the same?

Question 2.

Colin's corporation has a perpetual stream of EBIT equal to $250m per year. The cost of capital for the unlevered firm is 12%. The firm incurs $30m of interest payments for the perpetual bonds it has issued. The cost of debt is 6%. The corporate tax rate is 40%.
a) What is the value of the unlevered firm?
b) What is the value of the levered firm?
c) What is the value of equity of the firm if D/E is 0.35?
d) If the levered beta of the firm is 1.5, what is its unlevered beta?
e) If the D/E of the firm increases from 0.35 to 0.65, how does the levered beta changes (compare to 'd')? How do you explain this change?

Reference no: EM133291100

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