A new business will generate a one-time cash flow of $20,000 after one year.The business will be financed with 50% equity and 50% debt.If the firm's unlevered equity cost of capital is 10%,what is the levered value of the firm with perfect capital markets?
A)$18,182
B)$20,000
C)$19,000
D)$22,000
E)$18,000

Question

Quizplus · Accepted Answer

The levered value of the firm with perfect capital markets is $18,182. This is calculated as follows:Levered value = Unlevered value / (1 - (Debt / (Debt + Equity)) * (Debt cost - Equity cost))= 20,000 / (1 - (0.5 / (0.5 + 0.5)) * (0.1 - 0.1))= 20,000 / (1 - 0)= 20,000 / 1= $18,182

A New Business Will Generate a One-Time Cash Flow of $20,000