(a) Financing sources tend to change across the firm life cycle. Identify two (2) sources of financing a small start-up business could explore to raise seed capital (beyond that provided by the entrepreneur starting the business) and two (2) sources of financing a large publicly-listed company might use to raise capital (b) Paper Ltd and Pen Ltd are each looking to borrow funds from a commercial bank for 5 years. Paper Ltd has an excellent credit rating and can borrow at the prime rate. Pen Ltd's credit rating is prime + 2. The current prime rate is 7%. The 30-year Treasury bond yield is 5%, 10-year Treasury bond yield is 4.5%, 5-year Treasury bond yield is 4%, and the 3-month Treasury bill yield is 3%. What loan rate should the bank quote for each of Paper and Pen? (c) If all the assumptions of M&M's original theory hold, except that there are company taxes, explain the effect on the value of a company as it shifts its capital structure more towards debt.
(a) Financing sources tend to change across the firm life cycle. Identify two (2) sources of financing a small start-up business could explore to raise seed capital (beyond that provided by the entrepreneur starting the business) and two (2) sources of financing a large publicly-listed company might use to raise capital (b) Paper Ltd and Pen Ltd are each looking to borrow funds from a commercial bank for 5 years. Paper Ltd has an excellent credit rating and can borrow at the prime rate. Pen Ltd's credit rating is prime + 2. The current prime rate is 7%. The 30-year Treasury bond yield is 5%, 10-year Treasury bond yield is 4.5%, 5-year Treasury bond yield is 4%, and the 3-month Treasury bill yield is 3%. What loan rate should the bank quote for each of Paper and Pen? (c) If all the assumptions of M&M's original theory hold, except that there are company taxes, explain the effect on the value of a company as it shifts its capital structure more towards debt.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:(a) Financing sources tend to change across the firm life cycle. Identify two (2)
sources of financing a small start-up business could explore to raise seed capital
(beyond that provided by the entrepreneur starting the business) and two (2) sources
of financing a large publicly-listed company might use to raise capital
H
(b) Paper Ltd and Pen Ltd are each looking to borrow funds from a commercial bank
for 5 years. Paper Ltd has an excellent credit rating and can borrow at the prime
rate. Pen Ltd's credit rating is prime + 2. The current prime rate is 7%. The 30-year
Treasury bond yield is 5%, 10-year Treasury bond yield is 4.5%, 5-year Treasury
bond yield is 4%, and the 3-month Treasury bill yield is 3%. What loan rate should
the bank quote for each of Paper and Pen?
(c) If all the assumptions of M&M's original theory hold, except that there are
company taxes, explain the effect on the value of a company as it shifts its capital
structure more towards debt.
(
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