Based on modigliani and miller's propositions i and ii in a perfect world without taxes nor distress costs, if the original unlevered firm value is $100 million and the cfo is planning to carry out a leveraged recapitalization to a debt equity ratio of 1: 2. what’s the levered firm value? if the unlevered equity requires 11% annual return and the debt requires a 5% of annual return, what’s the required return for the levered equity? show all steps and equations.

Consider the following calculations

Explanation:

Value of levered firm = Value of unlevered firm + debt*tax rate

As tax rate = 0

Value of levered firm = Value of unlevered firm =100m

Levered cost of equity = Unlevered cost of equity+D/E*( Unlevered cost of equity-cost of debt)*(1-tax rate)

Levered cost of equity = 11+0.5*(11-5)*(1-0)

Levered cost of equity = 14

the investment was $14,174.196

explanation:

a lump sum means that the father of the example made one deposit and leave it be.

we need to know the value of a capital that generated at 4.05% per year during 28 years the sum of $48,613.24

now clearing the formula to solve for capital we got:

and we reach the answer investment = $14,174.20