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An un-levered firm, Toronto Make Believes Ltd. has EBIT of $500,000 that it expects it will earn forever and it pays all of its earnings as dividends to shareholders (ie., no growth). Toronto Make Believes Ltd. has 100,000 shares outstanding and there are no taxes. All debt will have coupon interest of 6 percent. You observe in the market that government T-bills are being sold to yield 4 percent and the market risk premium is 5 percent.

a. find out the required rate of return for the shareholders of this un-levered firm. Beta of the unlevered firm is 1.2

Basic Finance, Finance

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