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SOS Ltd is currently an all-equity firm and has a market value of $800,000. SOS is...

SOS Ltd is currently an all-equity firm and has a market value of $800,000. SOS is evaluating whether a levered capital structure would maximize the wealth of shareholders. The cost of equity is currently 15%. The new capital structure under consideration is an issue of $400,000 new perpetual debt with an 8% interest rate. There are currently 32,000 shares outstanding and a tax rate of 35% applies to this firm. If SOS finally changes to the new levered capital structure,

(a) Calculate the present value of tax shield and explain it briefly. (Show your calculations).

(b) Calculate the firm value and the cost of equity under the levered capital structure. Explain the change in cost of equity briefly. (Show your calculations)

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SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

jeff jeffy answered 1 year ago
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