1. A firm has a levered beta of 1.60, and its debt to equity ratio is 2.0. What would the company be if it used no debt, i.e., what is its unlevered beta if the corporate tax rate is 20%?
2. There are two firms: Firm U and Firm L. Both firms have $100M total assets and $30M EBIT (earnings before interest and taxes). Firm U is an unleveraged firm without debt. Firm L is a leveraged firm with 50% of debt and 50% of common equity. The pre-tax cost of debt for Firm L is 10%. Both firms have 20% corporate tax rate. Calculate the return on equity (ROE) for the unleveraged firm U
Based on the information from Question 3. Calculate the return on equity (ROE) for the leveraged firm L