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Firms A and B are identical except for their capital structure: A is fully equity financed, while B carries £50m of debt on which it pays 59% interest. Both firms are projected to generate annual cash flows of £10m in perpetuity. A's cost of capital is 10%. Assume perfect capital markets and no taxes. In the absence of arbitrage opportunities, what is the value of firm B's equity and its cost of equity capital? O £100m and 1096 O £50m and 156 O £150m and 1096 O £100m and 5%

Firms A and B are identical except for their capital structure: A is fully equity financed, while B carries £50m of debt on which it pays 59% interest. Both firms are projected to generate annual cash flows of £10m in perpetuity. A's cost of capital is 10%. Assume perfect capital markets and no taxes. In the absence of arbitrage opportunities, what is the value of firm B's equity and its cost of equity capital? O £100m and 1096 O £50m and 156 O £150m and 1096 O £100m and 5%

Essentials Of Investments
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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Firms A and B are identical except for their capital structure: A is fully equity financed, while B carries £50m of debt on which it pays 5% interest. Both firms are projected to generate annual cash flows of £10m in perpetuity. A's cost of capital is 10%. Assume perfect capital markets and no taxes. In the absence of arbitrage opportunities, what is the value of firm B's equity and its cost of equity capital? O £100m and 10% O £50m and 15% O £150m and 10% O £100m and 5%
Transcribed Image Text:Firms A and B are identical except for their capital structure: A is fully equity financed, while B carries £50m of debt on which it pays 5% interest. Both firms are projected to generate annual cash flows of £10m in perpetuity. A's cost of capital is 10%. Assume perfect capital markets and no taxes. In the absence of arbitrage opportunities, what is the value of firm B's equity and its cost of equity capital? O £100m and 10% O £50m and 15% O £150m and 10% O £100m and 5%
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