Question: Whenever applicable, interest is compounded annually and payments occur at the end of the period. Face value for bonds is $1000.
Bookstore Inc. has a tax rate of 30% and an EBIT of $50 million. The unlevered cost of capital is 14%.
a. What is the value of the unlevered firm? What is the cost of equity for the unlevered firm?
b. Now suppose that Bookstore 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.