Answer Happy

Mercer Inc. has a debt-to-equity ratio of 0.40. The required
return on the company’s unlevered equity is 12%, and the pretax
cost of the firm’s debt is 8%. Sales revenue for the company
is
expected to remain stable indefinitely at last year’s level of
$18,500,000 Variable costs (including SG & A expenses) are 65
percent of sales. The corporate tax rate is 31% The company
distributes all its earnings as dividends at the end of each
year.
a. If the company were financed entirely by equity, how much would
it be worth?
b. What is the required return on the company’s levered
equity?
c. Use the weighted average cost of capital (WACC) approach to
calculate the value of the
company. What is the value of the company’s equity? What is the
value of the company’s debt?
d. Use the flow to equity (FTE) approach to calculate the value of
the company’s equity (Hint:
use the value of debt calculated in part c to calculate interest
expense).