Question

The following information is available for two firms, Cheetah Limited and Lion Limited.

a. Calculate the market values of equity, debt and firm for both Cheetah Limited and Lion Limited.(8 marks) b. What is the Weighted Average Cost of Capital (WACC) for each of the two firms? c. What happens to the average cost of Cheetah Limited if it employs $30 million of debt to finance a project that yields an operating income of $4 million? (8 marks) d. What are the likely implications for the cost of equity, and thus the WACC, if the debt increases significantly such that the long-term gearing changes? (2 marks)

Fig: 1

Fig: 2

Fig: 3

Fig: 4

Fig: 5

Fig: 6