Guam Motors is presently an all equity firm. It needs to raise $2.5m in additional funds. After raising its funds, it expects perpetual EBIT to be $600,000. The firm's unlevered cost of equity is 12% and its before tax cost of debt is 8%. 1) If there are no corporate taxes, under M-M theory what is the value of Guam Motors if it employs common stock to raise the needed funds? 2)If there are no corporate taxes and Guam Motors employs debt to raise 50% of the firm value, what is the cost of equity, the weighted average cost of capital and the value of the firm? 3) If there are no corporate taxes and M-M theory holds, will investors prefer levered
Guam Motors is presently an all equity firm. It needs to raise $2.5m in additional funds. After raising its funds, it expects perpetual EBIT to be $600,000. The firm's unlevered cost of equity is 12% and its before tax cost of debt is 8%. 1) If there are no corporate taxes, under M-M theory what is the value of Guam Motors if it employs common stock to raise the needed funds? 2)If there are no corporate taxes and Guam Motors employs debt to raise 50% of the firm value, what is the cost of equity, the weighted average cost of capital and the value of the firm? 3) If there are no corporate taxes and M-M theory holds, will investors prefer levered
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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Transcribed Image Text:Guam Motors is presently an all equity firm. It needs to raise $2.5m in additional funds.
After raising its funds, it expects perpetual EBIT to be $600,000. The firm's unlevered
cost of equity is 12% and its before tax cost of debt is 8%.
1) If there are no corporate taxes, under M-M theory what is the value of Guam Motors
if it employs common stock to raise the needed funds?
2)If there are no corporate taxes and Guam Motors employs debt to raise 50% of the
firm value, what is the cost of equity, the weighted average cost of capital and the
value of the firm?
3) If there are no corporate taxes and M-M theory holds, will investors prefer levered
firm to the unlevered firm? Why?
4)Will the presence of corporate taxes increase or decrease the firm value? Why?
5)Assume that corporate tax is 25%. What is the all equity value of Guam Motors?
6)If the corporate tax is 25% and Guam Motors employees same amount of debt as in 2)
to raise part of the firm value, what is the cost of equity,the weighted average cost of
capital and the value of the firm?
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