Assume capital markets are perfect (i.e. the Modigliani-Miller Theorems hold). The Cat Nap Pet Stores capitalstructure is currently comprised of 13 million dollars of debtand 16 million dollars of equity. If the firm issues 2 milliondollars in new debt, what will the value of the company'sequity be after the issuance of the new debt?

In a world with perfect capital markets and the Modigliani-Miller Theorems, a firm's equity value is…

Answered: Assume capital markets are perfect…

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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(Use the following information for the next three questions). Consider a world with taxes but no other market imperfections. BLT machinery has a debt to equity ratio of 2/3. Its cost of equity is 20%, cost of debt is 4%, and tax rate is 35%. Assume that the risk-free rate is 4%, and market risk premium is 8%. Suppose the firm repurchases stock and finances the repurchase with debt, causing its debt to equity ratio to change to 3/2. What is the firm's new cost of equity? None of the choices New cost of equity is 26.05% New cost of equity is 23.59% New cost of equity is 16.32% New cost of equity is 28.00%
According to Modigliani and Miller (M&M), in a world of perfect capital markets, what will be the expected equity return (or cost of equity) for a firm that has a cost of capital of 10 percent, a cost of debt of 6 percent, debt valued at $1.2 million, and equity valued at $1.0 million?
A firm is worth $50 or $180 with equal probability and is financed with debt that has a face value of $60. It is considering a new project that is equally likely to be worth - $50 or +$40. The cost of capital is 12% for all securities. 1. Calculate the present values of the firm’s debt and equity, assuming that the project is not undertaken. 2. What will happen to the value of the firm if the new project is undertaken?
Hardmon enterprises is currently an all equity firm with an expected return of 16%. Its a leveraged recapitalization in which it would borrow and repurchase existing shares. Assume perfect capital markets. Suppose Hardmon borrows to the point that it’s debt-equity ratio is .50. With this amount of debt, the debt cost of capital is 6%. What will be the expected return of equity after this transaction?
Your boss has just asked you to calculate your firm's cost of capital. Below is potentially relevant information for your calculation. What is your firm's Weighted Average Cost of Capital? Common Equity: Book Value = $100 million, Market Value = $150 million, Net Income from most recent fiscal year = $12 million, Required rate of return (from CAPM) = 11%, Dividend Yield = 2%. Debt: Book Value = $100 million, Market Value = $90 million, average coupon rate = 4%, average yield to maturity = 4.4%, average maturity = 10 years. Corporate Tax Rate = 21%.
An unlevered firm has expected earnings of $2,401 and a market value of equity of $19,600. The firm is planning to issue $4,000 of debt at 6 percent interest and use the proceeds to repurchase shares at their current market value. Ignore taxes. What will be the cost of equity after the repurchase?
Only answer the subpart b) please! Show calculation steps 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, What would the firm value be after debt issuance? Firm Value = Equity Value + Debt Value - Cash. What would be the cost of equity after debt is raised? What would be the WACC after debt is raised? b)In a MM world with tax rate of 40%, What would be the cost of equity after debt is raised? What would be the additional value created by debt? What would be the WACC after debt is raised?
Wolfrum Technology (WT) has no debt. Its assets will be worth $467 million one year from now if the economy is strong, but only $295 million in one year if the economy is weak. Both events are equally likely. The market value today of its assets is $291 million. a. What is the expected return of WT stock without leverage? b. Suppose the risk-free interest rate is 5%. If WT borrows $139 million today at this rate and uses the proceeds to pay an immediate cash dividend, what will be the market value of its equity just after the dividend is paid, according to MM? c. What is the expected return of WT stock after the dividend is paid in part (b)? a. The unievered expected return of WT stock is (Round to two decimal places)
An all-equity firm will spend $1,500,000 to expand the business. It has $100,000 in cash, can borrow up to $900,000, and can issue up to $1,000,000 in new equity. If the firm applies the pecking order theory of capital structure, what percentage of the expansion will be financed with debt?
What is the value of the following firm if free cash flows are expected to be a constant £30m per year forever, the post-tax cost of debt is 6%, the cost of equity capital is 14%, and half the firm’s capital is debt and half is equity? a £400m b I do not want to answer this question. c £250m d £350m e £450m f £300m
Ganado's Cost of Capital. Maria Gonzalez, Ganado's Chief Financial Officer, estimates the risk-free rate to be 3.30%, the company's credit risk premium is 3.60%, the domestic beta is estimated at 0.94, the international beta is estimated at 0.61, and the company's capital structure is now 75% debt. The expected rate of return on the market portfolio held by a well-diversified domestic investor is 9.80% and the expected return on a larger globally integrated equity market portfolio is 8.60%. The before-tax cost of debt estimated by observing the current yield on Ganado's outstanding bonds combined with bank debt is 7.60% and the company's effective tax rate is 42%. For both the domestic CAPM and ICAPM, calculate the following: a. Ganado's cost of equity b. Ganado's after-tax cost of debt c. Ganado's weighted average cost of capital a. Using the domestic CAPM, what is Ganado's cost of equity? % (Round to two decimal places.)
Suppose Goodyear Tire and Rubber Company is considering divesting one of its manufacturing plants. The plant is expected to generate free cash flows of 51.54 million per year, growing at a rate of 2.4% per year. Goodyear has an equity cost of capital of 8,7%, a debt cost of capital of 6.7%, a marginal corporate tax rate of 38%, and a debt- equity ratio of 2.6. If the plant has average risk and Goodyear plans to maintain a constant debt equity ratio, what after tax amount must it receive for the plant for the divestiture to be profitable?

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