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    APV, Unlevered cost of capital, Debt=equity ratio

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    A firm has a cost of equity of 13.8% and a pre-tax cost of debt of 8.5%. The debt-equity ratio is .60 and the tax rate is .34. What is the firm's unlevered cost of capital?
    a. 8.83%
    b. 12.30%
    c. 13.97%
    d. 14.08%
    e. 14.60%

    Your firm has a pre-tax cost of debt of 7% and an unlevered cost of capital of 13%. Your tax rate is 35% and your cost of equity is 15.26%. What is your debt-equity ratio?
    a. .43
    b. .49
    c. .51
    d. .54
    e. .58

    A project has a NPV, assuming all equity financing, of $1.5 million. To finance the project, debt is issued with associated flotation costs of $60,000. The flotation costs can be amortized over the project's 5 year life. The debt of $10 million is issued at 10% interest, with principal repaid in a lump sum at the end of the fifth year. If the firm's tax rate is 34%, calculate the project's APV.

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    Solution Preview

    A firm has a cost of equity of 13.8% and a pre-tax cost of debt of 8.5%. The debt-equity ratio is .60 and the tax rate is .34. What is the firm's unlevered cost of capital?
    a. 8.83%
    b. 12.30%
    c. 13.97%
    d. 14.08%
    e. 14.60%

    Solution: - Computation of Firms unlevered cost of capital

    Re = Ra + (D/E) (Ra - Rd) (1 - Tc)

    0.138 = x + (0.6) (x - 0.085) (1 -0.34)
    0.138 = x + 0.396x-0.03366
    0.138 = 1.396x - ...

    Solution Summary

    The firm's unlevered cost of capital for a cost of equity of 13.8% and a pre-tax cost of debt being 8.5% is determined.

    $2.19