Question #190892

North Corp. EBIT is $200. It has a debt-equity ratio of 25% and a WACC of 16%. Debt

interest is 12%. Without taxes, what is the value of the equity? What is the value of the

firm? What is the cost of equity capital?

Expert's answer

we will find it using the formulas:

"DFL=\\frac{EBIT}{EBIT-Interests}"

DFL=0.25

"0.25=\\frac{200}{200-Interests}"

Interests=-600

"I=debt\\times r"

"debt=\\frac{I}{r}=\\frac{-600}{0.12}=-5000"

"debt-equity ratio=\\frac{L}{E}"

L=5000

"0.25=\\frac{5000}{E}"

E=20 000

"value of the firm=E+L=20 000+5000=25000"

"WACC=Ks\\times Ws+Kd\\times Wd"

"0.16=Ks\\times \\frac{20 000}{25 000}+0.12\\times \\frac{5000}{25000}"

"0.16=Ks\\times 0.8+0.12\\times0.2"

"0.136=Ks\\times 0.8"

Ks=0.17 or 17%

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