please answer the questions for finance final

timer Asked: Dec 13th, 2015

Question description

An unlevered firm with a real cost of capital of 15% earns constant inflation-adjusted before-tax profits of $1,000,000 perpetually in an economy where the tax rate is 40%. The firm decides to borrow $2,000,000 at a debt cost of 10% to buy back its own equity.

(a) What is the total value of the firm before the share buy-back?

(b) What will be the total value of the firm after the share buy-back?

 (c) What will be the debt-equity ratio of the firm after the buy-back? 

(d) What will be the cost of equity for the firm after the buy-back?

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