Homework Answers
| a ( firm has zero debt) | ||||
| EBIT | $1,500.00 | |||
| Interest (Debt * Interest rate) | $0.00 | |||
| EBT (EBIT - Interest) | $1,500.00 | |||
| Tax (EBIT * Tax rate) | -$315.00 | |||
| PAT (EBIT - Tax ) | $1,185.00 | |||
| Equity Value = PAT / Risk free rate | $19,750.00 | |||
| Debt Value | $0.00 | |||
| Value of Firm (Equity value + Debt Value) | $19,750.00 | |||
| To calculate the equity value I have used formula of present value of perpetual cashflow | ||||
| PV = Cashflow / Interest rate | ||||
| Note : As there is no working capital and capex and depreciation are same, hence PAT is equivalent to cashflow to the firm | ||||
| b ( firm has interest expense of $ 1,000) | ||||
| EBIT | $1,500.00 | |||
| Interest (Debt * Interest rate) | -$1,000.00 | |||
| EBT (EBIT - Interest) | $500.00 | |||
| Tax (EBIT * Tax rate) | -$105.00 | |||
| PAT (EBIT - Tax ) | $395.00 | |||
| Equity Value = PAT / Risk free rate | $6,583.33 | |||
| Debt Value = (Interest / Interest rate) | $16,666.67 | |||
| Value of Firm (Equity value + Debt Value) | $23,250.00 | |||
| c (Difference between the value of firm with leverage and without leverage) | ||||
| Value of firm with leverage (A) | $23,250.00 | |||
| Value of firm without leverage (B) | $19,750.00 | |||
| Difference (A-B) | $3,500.00 | |||
| d (Difference in c is equal to what percentage of debt) | ||||
| Difference | $3,500.00 | |||
| Debt Value | $16,666.67 | |||
| Difference in firm value / Debt Value | 21.0% | |||
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