The manager of a firm at t=0 has to decide whether to liquidate or to continue. If he decides to continue in t=1, the valueof the firm assets will be Va= €140 million assuming business recovers. Nevertheless, the most likely scenario ((1-p) =85%) is that the company sales will continue declining. Then, company assets will be valued only at Vẞ = €78 million. Atwhat debt value, we see an inefficiency case because Managers' Aversion to Liquidation.a.$60 millionO b. None *C.$100 milliond.$80 millionYour answer is incorrect.The correct answer is:$100 million

Step 1:The image you sent is a decision-making problem about a firm facing financial difficulty. The…

Answered: The manager of a firm at t=0 has to…

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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1) A firm that is currently unlevered has WACC = rS = 10%/year. This company plans to do a recapitalization by issuing debt and repurchasing equity. After the recapitalization, the debt-to-equity (D/E) ratio will be 0.5. If the cost of debt, rD, is 6%, what will be rS after the recapitalization? 2) A firm with wD = 0.35 and wS = 0.65 plans to issue another $100 million of permanent debt. The firm's tax rate is 21%. The bonds will be issued at par with coupon rate = rD = 7%/year. The firm's WACC is 11%/year. By how much will the new debt change the value of the firm, and who will receive this value? A) Firm value will increase by $21 million, and all $21 million will go to the shareholders B) Firm value will increase by $9 million, and 35% will go to the bondholders, 65% to the shareholders C) Firm value will increase by $18.6 million, and 35% will go to the bondholders, 65% to the stockholders D) Firm value will increase by $21 million, and all $21 million will go to the…
Which of the following statements is most correct? Group of answer choices None of these. A firm facing a steep demand curve (that is, high flotation costs) for new equity would likely also face, at some point, a steeply upward sloping WACC curve. A breakpoint is based on the dollar value used of a specific type of capital, and occurs at the point where the cost of that capital type increases. Thus, if a firm has $100,000 in earnings, and stockholders want $50,000 of those earnings paid as dividends, then retained earnings will have two breakpoints. One purpose of calculating the WACC is to have a singular cost of capital measure that can be applied to evaluate all of the firm's projects, including those of greater than and lesser than average risks.
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