Final answer:
The value of the levered firm is $331,372.55. The value of the levered equity is $182,372.55. The cost of the levered equity is 6.12%
Step-by-step explanation:
Let's solve these questions step by step:
a) What is the value of the levered firm?
The value of the levered firm can be calculated using the formula:
Value of the Levered Firm = EBIT (1 - Tax Rate) / Cost of Levered Capital
Substituting the given values, we get:
Value of the Levered Firm = 85,000 * (1 - 0.40) / 0.102 = $331,372.55
b) What is the value of the levered firm?
To find the value of the levered equity, we can subtract the value of debt from the value of the levered firm:
Value of Levered Equity = Value of Levered Firm - Debt
Substituting the values, we get:
Value of Levered Equity = $331,372.55 - $149,000 = $182,372.55
c) What is the cost of the levered equity?
The cost of levered equity can be calculated using the formula:
Cost of Levered Equity = Cost of Levered Capital (1 - Tax Rate)
Substituting the values, we get:
Cost of Levered Equity = 0.102 * (1 - 0.40) = 0.0612 or 6.12%
d) What is the weighted average cost of capital?
The weighted average cost of capital (WACC) can be calculated by multiplying the cost of debt by the weight of debt, and adding it to the cost of equity multiplied by the weight of equity:
WACC = (Cost of Debt * Weight of Debt) + (Cost of Equity * Weight of Equity)
In this case, since there is no information regarding the weights of debt and equity, we cannot calculate the exact WACC.