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Suppose that Firm A generates earnings of 100 in any period, has an unlevered cost of equity of 15%, and cost of debt equal to 8%. The firm initially has debt with market value of 100, and corporate income tax rate is initially 35%.

Now suppose that the firm takes on another 100 in debt. At the same time, the corporate income tax is reduced to 15%. What is the combined effect of the leverage increase and the tax rate reduction on the value of equity and the cost of levered equity?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92762557

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