The required rate of return for the un-levered firm

Reference no: EM131510913

EIEIO Agriculture Inc. is a sole proprietorship company that is located in New Bedford Nova Scotia that is owned by your best friend and they have come to you for advice – don’t disappoint them. Your friend is the only owner. The company is currently an un-levered firm. A company in this type of industry has a beta of 1.428571429 and you observe that government t-bills are selling to yield 3% and the market portfolio has an expected return of 10%. Your friend expects that they will be able to earn the required rate of return forever on an expected before tax earnings of $800,000 per year. Note: all final rates carry 6 decimal places. A. Assuming that the tax rate is 0 and there is no cost for the risk of default, what is:

i. the required rate of return for the un-levered firm. Show all of your work

ii. the market value of the un-levered firm using proposition I. Show all of your work

iii. the WACC for the firm using proposition II. Show all of your work

iv. If the firm were to issue $2,000,000 in debt with a 4 percent coupon, calculate the market value of the firm and the WACC for the levered firm. Show all of your work

Reference no: EM131510913

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