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Unlevering the Equity Cost of Capital-Low Leverage & High Leverage Companies: Below, we show the information for two potential comparable companies. Calculate the unlevered cost of capital based on the following assumptions. Neither company expects its free cash flows to grow. Income tax rate for interest (TINT) Value of debt Value of preferred stock. Value of equity Maturity of debt (years) Debt cost of capital Preferred stock cost of capital. Equity cost of capital Low Leverage Company 35.0% $ 4,000 $ 1,000 $15,000 Perpetual 5.0% 6.0% 11.8% High Leverage Company 45.0% $45,000 $ 0 $ 5,000 Perpetual 8.0% 28.0% a. b. Assume that interest is tax deductible and that the discount rate for all interest tax shields is the unlevered cost of capital. Assume that interest is tax deductible and that the discount rate for all interest tax shields is the cost of debt. C. Assume that interest is tax deductible but that the company refinances its debt at the end of each year (annual refinancing).

Unlevering the Equity Cost of Capital-Low Leverage & High Leverage Companies: Below, we show the information for two potential comparable companies. Calculate the unlevered cost of capital based on the following assumptions. Neither company expects its free cash flows to grow. Income tax rate for interest (TINT) Value of debt Value of preferred stock. Value of equity Maturity of debt (years) Debt cost of capital Preferred stock cost of capital. Equity cost of capital Low Leverage Company 35.0% $ 4,000 $ 1,000 $15,000 Perpetual 5.0% 6.0% 11.8% High Leverage Company 45.0% $45,000 $ 0 $ 5,000 Perpetual 8.0% 28.0% a. b. Assume that interest is tax deductible and that the discount rate for all interest tax shields is the unlevered cost of capital. Assume that interest is tax deductible and that the discount rate for all interest tax shields is the cost of debt. C. Assume that interest is tax deductible but that the company refinances its debt at the end of each year (annual refinancing).

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)
Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)
8th Edition
ISBN:9781285065137
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Eugene F. Brigham, Joel F. Houston
Chapter13: Capital Structure And Leverage
Section: Chapter Questions
Problem 14SP: WACC AND OPTIMAL CAPITAL STRUCTURE Elliott Athletics is trying to determine its optimal capital...
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6 P10.4 Unlevering the Equity Cost of Capital-Low Leverage & High Leverage Companies: Below, we show the information for two potential comparable companies. Calculate the unlevered cost of capital based on the following assumptions. Neither company expects its free cash flows to grow. Income tax rate for interest (TINT). Value of debt Value of preferred stock. Value of equity Maturity of debt (years) Debt cost of capital. Preferred stock cost of capital. Equity cost of capital. Low Leverage Company High Leverage Company 35.0% $ 4,000 $ 1,000 $15,000 45.0% $45,000 $ 0 Perpetual $ 5,000 Perpetual 5.0% 8.0% 6.0% 11.8% 28.0% a. b. C. Assume that interest is tax deductible and that the discount rate for all interest tax shields is the unlevered cost of capital. Assume that interest is tax deductible and that the discount rate for all interest tax shields is the cost of debt. Assume that interest is tax deductible but that the company refinances its debt at the end of each year (annual refinancing). Chapter 10 | Levering and Unlevering the Cost of Capital and Beta P10.5 Unlevering the Equity Beta-Low Leverage & High Leverage Companies: Use the information from P10.4 and assume that the risk-free rate is 4% and that the market risk premium is 6%. Respond to each part of P10.4 but calculate the unlevered beta instead of the unlevered cost of capital.
Transcribed Image Text:6 P10.4 Unlevering the Equity Cost of Capital-Low Leverage & High Leverage Companies: Below, we show the information for two potential comparable companies. Calculate the unlevered cost of capital based on the following assumptions. Neither company expects its free cash flows to grow. Income tax rate for interest (TINT). Value of debt Value of preferred stock. Value of equity Maturity of debt (years) Debt cost of capital. Preferred stock cost of capital. Equity cost of capital. Low Leverage Company High Leverage Company 35.0% $ 4,000 $ 1,000 $15,000 45.0% $45,000 $ 0 Perpetual $ 5,000 Perpetual 5.0% 8.0% 6.0% 11.8% 28.0% a. b. C. Assume that interest is tax deductible and that the discount rate for all interest tax shields is the unlevered cost of capital. Assume that interest is tax deductible and that the discount rate for all interest tax shields is the cost of debt. Assume that interest is tax deductible but that the company refinances its debt at the end of each year (annual refinancing). Chapter 10 | Levering and Unlevering the Cost of Capital and Beta P10.5 Unlevering the Equity Beta-Low Leverage & High Leverage Companies: Use the information from P10.4 and assume that the risk-free rate is 4% and that the market risk premium is 6%. Respond to each part of P10.4 but calculate the unlevered beta instead of the unlevered cost of capital.
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