Firm A and B have the same capital structure. A: No debt. B: have £100m debt and pay 5% interest rate. Assume: no tax and perfect capital market. The firm lend and borrow at same risk-free rate. 1）B's weighted average cost of capital （Answer：8） 2）Assume A is fairly priced, what would be B’s weighted average cost of capital in the absence of arbitrage opportunities? （Answer：10 or 0.1）
Firm A and B have the same capital structure. A: No debt. B: have £100m debt and pay 5% interest rate. Assume: no tax and perfect capital market. The firm lend and borrow at same risk-free rate. 1）B's weighted average cost of capital （Answer：8） 2）Assume A is fairly priced, what would be B’s weighted average cost of capital in the absence of arbitrage opportunities? （Answer：10 or 0.1）
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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Firm A and B have the same capital structure. A: No debt. B: have £100m debt and pay 5% interest rate. Assume: no tax and perfect capital market. The firm lend and borrow at same risk-free rate.
1）B's weighted average cost of capital （Answer：8）
2）Assume A is fairly priced, what would be B’s weighted average cost of capital in the absence of arbitrage opportunities? （Answer：10 or 0.1）
Transcribed Image Text:A
В
Value of Firm
200
250
Debt
100
Equity
200
150
Earnings before interest
20
20
Interest payment
5
Interest rate
Not Applicable
5%
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