Chapter 14, Problem 11P

a)

Summary Introduction

To determine: The cash flows and value of the equity, if the economy is strong and weak according to Modigliani–Miller Proposition I.

Introduction:

Modigliani–Miller proposition:

The change in the distribution of cash flows between equity and debt, without altering the total cash flows of the firm, is known as Modigliani–Miller proposition.

b)

Summary Introduction

To determine: The return of the equity in a strong economy, weak economy, and the expected return.

Introduction:

Expected return is a process of estimating the profits and losses that an investor earns through the expected rate of returns. Standard deviation is the apportioned distribution of a collection of figures from its mean.

c)

Summary Introduction

To determine: The risk premium in debt, levered economy, unlevered economy, and the sensitivity of the levered equity return to systematic risk and its sensitivity compared to that of unlevered equity and risk premium compared to that of unlevered equity.

Introduction:

Expected return is a process of estimating the profits and losses that an investor earns through the expected rate of returns. Standard deviation is the apportioned distribution of a collection of figures from its mean.

d)

Summary Introduction

To determine: The debt–equity ratio of the firm in initial economy, strong economy, and weak economy.

Introduction:

Expected return is a process of estimating the profits and losses that an investor earns through the expected rate of returns. Standard deviation is the apportioned distribution of a collection of figures from its mean.

e)

Summary Introduction

To determine: The firm’s weighted average cost of capital (WACC).

Introduction:

Expected return is a process of estimating the profits and losses that an investor earns through the expected rate of returns. Standard deviation is the apportioned distribution of a collection of figures from its mean.