Assume a Modigliani and Miller (MM) world with perfect capital markets. Amtar Ltd starts out as an all-equity firm whose shares have an expected return of 12%. Amtar then does a leveraged recapitalization, issuing debt and repurchasing stock, until its debt- equity ratio is 0.6. Due to the increased risk after the leveraged recapitalization, shareholders now expected a return of 18%. Amtar's debt is risk-free. Amtar's cost of debt after the leveraged recapitalization is closest to: A) 8.5% В) 2.0% С) 8.0% D) 3.0%
Assume a Modigliani and Miller (MM) world with perfect capital markets. Amtar Ltd starts out as an all-equity firm whose shares have an expected return of 12%. Amtar then does a leveraged recapitalization, issuing debt and repurchasing stock, until its debt- equity ratio is 0.6. Due to the increased risk after the leveraged recapitalization, shareholders now expected a return of 18%. Amtar's debt is risk-free. Amtar's cost of debt after the leveraged recapitalization is closest to: A) 8.5% В) 2.0% С) 8.0% D) 3.0%
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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Can you guys help please? Answer is D
Transcribed Image Text:Assume a Modigliani and Miller (MM) world with perfect capital markets. Amtar Ltd
starts out as an all-equity firm whose shares have an expected return of 12%. Amtar then
does a leveraged recapitalization, issuing debt and repurchasing stock, until its debt-
equity ratio is 0.6. Due to the increased risk after the leveraged recapitalization,
shareholders now expected a return of 18%. Amtar's debt is risk-free. Amtar's cost of
debt after the leveraged recapitalization is closest to:
A) 8.5%
В) 2.0%
С) 8.0%
D) 3.0%
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