PLEASE ANSWER J&K :) THANK YOU! 1. Q Corporation and R Inc. are two companies with...

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PLEASE ANSWER J&K :) THANK YOU!
1. Q Corporation and R Inc. are two companies with verysimilar characteristics. The only difference between the twocompanies is that Q Corp. is an unlevered firm, and R Inc. is alevered firm with debt of $5 million and cost of debt of 10%. Bothcompanies have earnings before interest and taxes (EBIT) of $2million and a marginal corporate tax rate of 40%. Q Corp. has acost of capital of 15%.                       (20 marks total)
a. What is Q’s firmvalue?
b. What is R’s firmvalue?
c.   What is R’sequityvalue?                                                                       (1 mark)
d. What is Q’s cost of equitycapital?                                                      (1 mark)
e. What is R’s cost of equitycapital?                                                     .
f.   What is Q’sWACC?                                                                                   (1 mark)
g. What is R’sWACC?
h. Compare the WACC of the twocompanies. What do you conclude?      (1 mark)
i.    Whatprinciple have you proven in thiscase?                                              (1 mark)
j.   Both companiesare now evaluating a project that requires an initial investment of$1.15 million and that will yield cash inflows of $500,000 per yearfor the next three years. Assume that this project has the samerisk level as the individual firm’s assets. Should Q invest in thisproject? Should R invest in thisproject?
k. Based on your results forpart (j), discuss the effects of leverage and its tax shieldseffects on the future value of the two firms.                               (1 mark)

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3.9 Ratings (656 Votes)

j Calculating Equity for Q and R Since Q is unlevered firm therefore Debt 0 Q corporation EBIT 2million Debt 0 Interest 0 PBT EBIT I 2 million Tax 40 0402 080 million PAT PBT T 12 million Equity R corporation EBIT 2million Debt 5 See Answer

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PLEASE ANSWER J&K :) THANK YOU!1. Q Corporation and R Inc. are two companies with verysimilar characteristics. The only difference between the twocompanies is that Q Corp. is an unlevered firm, and R Inc. is alevered firm with debt of $5 million and cost of debt of 10%. Bothcompanies have earnings before interest and taxes (EBIT) of $2million and a marginal corporate tax rate of 40%. Q Corp. has acost of capital of 15%. (20 marks total)a. What is Q’s firmvalue? b. What is R’s firmvalue? c. What is R’sequityvalue? (1 mark)d. What is Q’s cost of equitycapital? (1 mark)e. What is R’s cost of equitycapital? .f. What is Q’sWACC? (1 mark)g. What is R’sWACC? h. Compare the WACC of the twocompanies. What do you conclude? (1 mark)i. Whatprinciple have you proven in thiscase? (1 mark)j. Both companiesare now evaluating a project that requires an initial investment of$1.15 million and that will yield cash inflows of $500,000 per yearfor the next three years. Assume that this project has the samerisk level as the individual firm’s assets. Should Q invest in thisproject? Should R invest in thisproject? k. Based on your results forpart (j), discuss the effects of leverage and its tax shieldseffects on the future value of the two firms. (1 mark)