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Cost of Equity for Slante Corp

The Slante Corporation is a zero growth firm with an expected EBIT of $100,000 and a corporate tax rate of 30 percent. Kimberly uses $500,000 of 12.0 percent debt financing, and the cost of equity to an unlevered firm in the same risk class is 16.0 percent.

A. What is the value of the firm according to MM with corporate taxes?

B. What is the firm's cost of equity?

C. The firm's gain from leverage according to the Miller model is $126,667. If the effective personal tax rate on stock income is 20 percent, what is the implied personal tax rate on debt income?

Solution Summary

The solution calculates the firm's cost of equity.