FIN 450
Rami Ahmed Al Hasan @16253
Elias Elkoussa @17067
May Mohammed @14325
Deena Shalab@16457
Reem Hani Arab @16185
CASE 4
An Introduction to Debt Policy and Value
1
(Table format and content from case)
0% debt/100% equity 25%debt/75% equity 50%debt/50% equity
BV of debt 0 $2,500 $5,000
BV of equity $10,000 $7,500 $5,000
MV of debt 0 $2,500 $5,000
MV of equity $10,000 $8,350 $6,700
Pretax cost of debt 0.07 0.07 0.07
After-tax cost of debt 0.0462 0.0462 0.0462
Market Weight of Debt 0 0.23 0.43
Market Weight of Equity 1.0 0.77 0.57
Un-levered Beta 0.8 0.8 0.8
Risk free rate 0.07 0.07 0.07
Market premium 0.086 0.086 0.086
Cost of equity 13.88% 15.4% 20.8%
WACC 13.88% 13.5% 13.8%
EBIT $2,103 $2,103 $2,103
- Taxes - 34% $1,388 $1,388 $1,388
EBIAT $1,388 $1,388 $1,388
+ Depreciation $500 $500 $500
- Cap exp. $(500) $(500) $(500)
FCF 1,388 1,388 1,388
Value of assets $10,000 $10,281 $10,058
The following are calculations for:
0% debt:......
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