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
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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![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%](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F80c80eaa-ee5b-49f1-b315-a06f0beb843d%2Fe2692310-1b4d-463d-a90c-3a812e2f944a%2Fkbbeh7e_processed.jpeg&w=3840&q=75)
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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