What is the market value of the un-levered firm

Reference no: EM131969571

Question: 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: EM131969571

Questions Cloud

Discuss challenges facing fema responding to disasters : Discuss challenges facing FEMA responding to disasters. What strategies should be taken to lessen these challenges?

What is the operating cash now for the project : Electrical is evaluating a project which will increase sales by $30,000. The project will cost $150,000 and will be depreciated straight-line to a zero book.

One argument for the irrelevance of exchange rate risk : One argument for the irrelevance of exchange rate risk is that:

Difference between measuring mutual fund performance : What is the difference between measuring a mutual fund’s performance relative to a peer group versus an index?

What is the market value of the un-levered firm : 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.

Evolutionary change versus revolutionary organizational : Compare and contrast evolutionary change versus revolutionary organizational change. What are the leadership challenges inherent

What is the new degree of operating leverage : What is the operating cash flow at 71,000 units? What is the new degree of operating leverage?

Identify which biological concepts from the course : Explain how the article relates to this course. Identify which biological concepts from the course and / or text are relevant to the topic covered in article.

Value of the company equity and the debt-to-value ratio : What is the value of the company’s equity and the debt-to-value ratio?

User Account

All Pages