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Please show formulas and calculations and not just results and numbers, and explain rationale for answers.

Carpet Inc. has a tax rate of 30% and an EBIT of $50 million.The unlevered cost of capital is 14%.

1. What is the value of the unlevered firm?

2. What is the cost of equity for the unlevered firm?

3. Now suppose that Ajax issues $90 million in debt to buy back stock.The cost of debt is 8%.For the levered firm, find the value of the levered firm and the cost of equity.

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92356679

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