An Unlevered fiRm Has a Cost of Capital of 16

question 90

Multiple Choice

An unlevered firm has a cost of capital of 16% and earnings before interest and taxes of $225,000. A levered firm with the same operations and assets has both a book value and a face value of debt
Of $850,000 with an 8% annual coupon. The applicable tax rate is 34%. What is the value of the
Levered firm?

• A) $928,125
• B) $1,110,125
• C) $1,178,125
• D) $1,217,125
• E) $1,778,125

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Definitions:

Risk

The possibility of loss, damage, or any other undesirable event.

Return

The profit or loss derived from an investment over a particular period, expressed either in percentage or absolute terms.

Tradeoff

A decision situation that involves diminishing or losing one quality, quantity, or property of a set or design in return for gains in other aspects.

Standard Deviation

A measure of the dispersion or variability in a set of data points, indicating how much the observations differ from the mean of the data set.