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Use the information below for Sprott Inc. to answer the questions that follow:

CURRENT CAP. STRUCTURE

Assets $ 20,000,000.00

Debt ? $ - ??

Equity $ 20,000,000.00

Share price $ 25.00

Shares outstanding 800,000

Bond coupon rate N/A

PROPOSED CAP. STRUCTURE

Asset $ 20,000,000.00

Debt $ 8,500,000.00

Equity $ 11,500,000.00

Share prices $ 23.00

Shares outstanding ???

Bond Coupon Rate 8%

There are no taxes. EBIT is expected to be $3 million, but could be as high as $4 million if an economic expansion occurs, or as low as $2.5 million if a recession occurs. All values are market values.

a. Suppose now that corporate taxes are in effect at a rate of 40.00% (this assumption will also hold for b. and c. below). What is the cost of equity for the unlevered firm based on expected EBIT?

b. What is the cost of equity of the levered firm?

c. What is the value of the levered firm?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92426458

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