Reference no: EM132937214

Question - The current market risk premium is 8% and the risk-free rate is 2%. You have been given the job of determining your firm's cost of capital components. The company has 10 million shares outstanding with a current market price of $22.05 per share. The market value of debt represents 30% of the capital structure and the yield to maturity is 7%. The β of the equity is 1.4 and the corporate tax rate is 35%. Assume financial distress costs and the risk of default are negligible. Interest expenses are tax deductible.

a. What is the (i) market value of equity, (ii) the market value of debt, and (iii) the market value of the whole firm?

b. What is the required rate of return for the firm's equity?

c. Assume the firm's levered cost of equity is 16% (i.e., assume your answer to (B) is 16%). Further assume the market value of equity is $200 million and the market value of debt is $100 million. What is the firm's weighted average cost of capital (WACC)?

d. Assume the firm's levered cost of equity is 16% (i.e., assume your answer to (B) is 16%). Further assume the market value of equity is $200 million and the market value of debt is $100 million. What would the firm's weighted average cost of capital (WACC) be if it were all-equity financed? Explain why the all-equity cost of capital is the same, higher, or lower than the levered firm's weighted average cost of capital.