A firm is solely financed by equity with market value of $50,000 and cost of equity of 10%. It wishes to raise another $30,000 via corporate bonds with cost of debt of 5% and use all of it to buy back outstanding equity (no cash holding). Hold investment policies fixed. a)In a MM world without taxes, 1)What would the firm value be after debt issuance? Firm Value = Equity Value + Debt Value - Cash. 2)What would be the cost of equity after debt is raised? 3)What would be the WACC after debt is raised?
A firm is solely financed by equity with market value of $50,000 and cost of equity of 10%. It wishes to raise another $30,000 via corporate bonds with cost of debt of 5% and use all of it to buy back outstanding equity (no cash holding). Hold investment policies fixed. a)In a MM world without taxes, 1)What would the firm value be after debt issuance? Firm Value = Equity Value + Debt Value - Cash. 2)What would be the cost of equity after debt is raised? 3)What would be the WACC after debt is raised?
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
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- A firm is solely financed by equity with market value of $50,000 and
cost of equity of 10%. It wishes to raise another $30,000 via corporate bonds with cost of debt of 5% and use all of it to buy back outstanding equity (no cash holding). Hold investment policies fixed. a)In a MM world without taxes, 1)What would the firm value be after debt issuance? Firm Value = Equity Value + Debt Value - Cash. 2)What would be the cost of equity after debt is raised? 3)What would be the WACC after debt is raised?
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