Final answer:
a) The unlevered firm value is $102,941.18.
b) The levered firm value is $251,941.18.
c) The cost of the levered equity is 15.18%.
d) The weighted average cost of capital is 9.72%.
Step-by-step explanation:
a. The value of the unlevered firm (also known as the enterprise value) can be calculated using the formula:
Unlevered Firm Value = EBIT * (1 - Tax Rate) / Unlevered Cost of Capital
Plugging in the given values, the calculation becomes:
Unlevered Firm Value = 85,000 * (1 - 0.4) / 0.102 = $102,941.18
b. The value of the levered firm can be calculated by adding the value of the debt to the unlevered firm value:
Levered Firm Value = Unlevered Firm Value + Debt = $102,941.18 + $149,000 = $251,941.18
The value of the levered equity can be found by subtracting the value of the debt from the levered firm value:
Levered Equity Value = Levered Firm Value - Debt = $251,941.18 - $149,000 = $102,941.18
c. The cost of the levered equity can be calculated using the formula:
Cost of Levered Equity = Unlevered Cost of Capital + ((Debt / Levered Equity) * (Unlevered Cost of Capital - Interest Rate))
Plugging in the given values, the calculation becomes:
Cost of Levered Equity = 0.102 + (($149,000 / $102,941.18) * (0.102 - 0.0675)) = 0.102 + (1.4451 * 0.0345) = 0.102 + 0.0498 = 0.1518 (or 15.18%)
d. The weighted average cost of capital (WACC) can be calculated as the weighted average of the cost of debt and the cost of levered equity:
WACC = ((Debt / Levered Firm Value) * Cost of Debt) + ((Levered Equity / Levered Firm Value) * Cost of Levered Equity)
Plugging in the given values, the calculation becomes:
WACC = (($149,000 / $251,941.18) * 0.0675) + (($102,941.18 / $251,941.18) * 0.1518) = 0.0315 + 0.0657 = 0.0972 (or 9.72%)