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Essay Details:
Essay text:
$(500) $(500) $(500)
FCF 1,388 1,388 1,388
Value of assets $10,000 $10,281 $10,058
The following are calculations for:
0% debt:
Cost of equity = Rf + Bu (Km - Krf) = 0.07 + 0.8(0.086) = 13.88%
WACC = WD*Kd+ Ws*rs = 0 + 13.88 = 13.88%
NOTE THAT: Km - Krf = Market Risk Premium
25% debt
Rs = r0 + D/E(r0-rb) = 13.88 + 1/3(13.88- 7) = 16.1
Alternatively:
Bl = Bu {1+ (1-T) (D/E)} = .8{1+ (1- .34) (1/3) = .976
Cost of equity = Rf+ Bl (Km - Krf) = 0.07+ .976 (0.086) = 15.4%
WAAC = .23*0.0462+ .77* 0.161= 13.5%
NOTE THAT: Km - Krf = Market Risk Premium
50% debt
Rs = r0 + D/E(r0-rb) = 13...
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