assignment 2 QUESTION 9 An unlevered firm has net operating profit after tax...
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Accounting
assignment 2
QUESTION 9
An unlevered firm has net operating profit after tax of $45,000. The tax rate is 25%. The unlevered beta is 0.70. The risk-free return is 5% and the market risk premium is 10%.
a) Find the value of the unlevered firm.
b) They plan to issue $30,000 in debt at 5% to buy back stock. It is a permanent capital structure change. The present value of financial distress costs is $5,000. Use the trade-off theory to estimate the value of the levered firm.
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