What is the required return on the firm levered equity

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Reference no: EM132065485

Lone Star Industries just issued $325,000 of perpetual 10 percent debt and used the proceeds to repurchase stock. The company expects to generate $136,000 of earnings before interest and taxes in perpetuity. The company distributes all its earnings as dividends at the end of each year. The firm’s unlevered cost of capital is 10 percent, and the corporate tax rate is 35 percent.

a. What is the value of the company as an unlevered firm? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Value of the company $

b. Use the adjusted present value method to calculate the value of the company with leverage. (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Value of the company $

c. What is the required return on the firm’s levered equity? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Required return %

d. Use the flow to equity method to calculate the value of the company’s equity. (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Value of the company $

Reference no: EM132065485

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