UNLEV Has an Expected Perpetual EBIT = $4,000

question 338

Multiple Choice

UNLEV has an expected perpetual EBIT = $4,000. The unlevered cost of capital = 15% and there are 20,000 shares of stock outstanding. The firm is considering issuing $8,800 in new par bonds to add financial leverage to the firm. The proceeds of the debt issue will be used to repurchase equity. The cost of debt = 10% and the tax rate = 34%. There are no flotation costs.

What is the value of UNLEV's equity after the restructuring?

• A) $11,792
• B) $12,600
• C) $12,819
• D) $13,592
• E) $16,461

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Definitions:

Method of Elimination

A technique in algebra for solving a system of equations by removing variables to find their values.

System of Equations

A set of equations with the same variables, which are to be solved simultaneously.

Method of Substitution

A technique for solving systems of equations where one of the equations is solved for one variable in terms of the others, and then substituted into the other equation(s).

System of Equations

A set of equations with the same variables, which are solved together to find the values of these variables.