Super Co, is currently keeping a constant debt-to-equity policy with a debt-to value ratio of 30%

Finance Dec 23, 2020

Super Co, is currently keeping a constant debt-to-equity policy with a debt-to value ratio of 30%. The after-tax unlevered cashflow is 35,000,000 a year in perpetuity and the unlevered value of assets is 545,000,000. The cost of debt is 4.45% and the tax rate is 34%. What is the levered return on equity?

Expert Solution

unlevered return on equity=after tax unlevered cash flow/unlevered value of assets=35000000/545000000=6.4220%

levered return on equity=cost of unlevered equity+(cost of unlevered equity-cost of debt)*Debt/Value*1/(1-Debt/value)*(1-tax rate)=6.4220%+(6.4220%-4.45%)*30%/(1-30%)*(1-34%)=6.9798%

Archived Solution

Unlocked Solution

You have full access to this solution. To save a copy with all formatting and attachments, use the button below.

Already a member? Sign In

Important Note: This solution is from our archive and has been purchased by others. Submitting it as-is may trigger plagiarism detection. Use it for reference only.

For ready-to-submit work, please order a fresh solution below.

Or get 100% fresh solution

Get Custom Quote