VWX Corporation has an
EBIT of $166,666.67, a corporate tax rate of 40%, debt of $500,000, and
unlevered cost of capital of 20%. The cost of debt capital is 10%. (10 marks)
a. What is the value of
VWX’s equity?
b. What is the cost of
equity capital for VWX?
c. What is the WACC?
d. Compare the WACC of
VWX to the WACC of an unlevered firm. What is your conclusion? What principle
have you proven in this case?
SOLUTION PREVIEW
a. What is the value of
VWX’s equity?
VU = [EBIT × (1 − Tc)] ÷ RU = [$166,666.67 × (1− .4)] ÷ .20 = $500,000
VL = VU + (Tc × D) = $500,000 + (.4 × $500,000) = $700,000
VL − VD = VE = $700,000 − $500,000 = $200,000
File name: VWX-Corporation-.xls File type: application/vnd.ms-excel Price: $6
