Please show formulas and calculations and not just results and numbers, and explain rationale for answers.
Wood Inc. has a tax rate of 30% and an EBIT of $50 million.The unlevered cost of capital is 14%.
What is the value of the unlevered firm? What is the cost of equity for the unlevered firm?
Now suppose that Wood Inc. issues $90 million in debt to buy back stock. The cost of debt is 8%.For the levered firm, find the value of the levered firm and the cost of equity.