Corporate Finance
3rd Edition
ISBN: 9780132992473
Author: Jonathan Berk, Peter DeMarzo
Publisher: Prentice Hall
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Textbook Question
Chapter 14, Problem 3P
Acort Industries owns assets that will have an 80% probability of having a market value of $50 million in one year. There is a 20% chance that the assets will be worth only $20 million. The current risk-free rate is 5%, and Acort’s assets have a cost of capital of 10%.
- a. If Acort is unlevered, what is the current market value of its equity?
- b. Suppose instead that Acort has debt with a face value of $20 million due in one year. According to MM, what is the value of Acort’s equity in this case?
- c. What is the expected return of Acort’s equity without leverage? What is the expected return of Acort’s equity with leverage?
- d. What is the lowest possible realized return of Acort’s equity with and without leverage?
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Students have asked these similar questions
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Milton Industries expects free cash flows of $19 million each year. Milton's corporate tax rate is 22 %, and its unlevered cost of capital is 13%. Milton also has outstanding debt of $73.37 million, and
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a. What is the value of Miton Industries without leverage?
b. What is the value of Milton Industries with leverage?
Cam
a. What is the value of Milton Industries without leverage?
The value of Milton Industries without leverage is 5 million (Round to two decimal places.)
b. What is the value of Milton Industries with leverage?
The value of Milton Industries with leverage is $million. (Round to two decimal places)
(Use the following information for the next three questions). Consider a
world with taxes but no other market imperfections. BLT machinery has a debt
to equity ratio of 2/3. Its cost of equity is 20%, cost of debt is 4%, and tax rate is
35%. Assume that the risk-free rate is 4%, and market risk premium is 8%.
Suppose the firm repurchases stock and finances the repurchase with debt,
causing its debt to equity ratio to change to 3/2.
What is the firm's new cost of equity?
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New cost of equity is 26.05%
New cost of equity is 23.59%
New cost of equity is 16.32%
New cost of equity is 28.00%
Chapter 14 Solutions
Corporate Finance
Ch. 14.1 - How does the risk and cost of capital of levered...Ch. 14.2 - Why are investors indifferent to the firms capital...Ch. 14.2 - What is a market value balance sheet?Ch. 14.2 - In a perfect capital market, how will a firms...Ch. 14.3 - How do we compute the weighted average cost of...Ch. 14.3 - With perfect capital markets, as a firm increases...Ch. 14.4 - If a change in leverage raises a firm's earnings...Ch. 14.4 - True or False: When a firm issues equity, it...Ch. 14.5 - Consider the questions facing Dan Harris, CFO of...Ch. 14.5 - Prob. 2CC
Ch. 14 - Consider a project with free cash flows in one...Ch. 14 - You are an entrepreneur starting a biotechnology...Ch. 14 - Acort Industries owns assets that will have an 80%...Ch. 14 - Wolfrum Technology (WT) has no debt. Its assets...Ch. 14 - Suppose there are no taxes. Firm ABC has no debt,...Ch. 14 - Suppose Alpha Industries and Omega Technology have...Ch. 14 - Prob. 7PCh. 14 - Prob. 8PCh. 14 - Zetatron is an all-equity firm with 100 million...Ch. 14 - Explain what is wrong with the following argument:...Ch. 14 - Prob. 11PCh. 14 - Hardmon Enterprises is currently an all-equity...Ch. 14 - Prob. 13PCh. 14 - Prob. 14PCh. 14 - Prob. 15PCh. 14 - Hartford Mining has 50 million shares that are...Ch. 14 - Mercer Corp. has 10 million shares outstanding and...Ch. 14 - Prob. 18PCh. 14 - Prob. 19PCh. 14 - Prob. 20PCh. 14 - Prob. 21PCh. 14 - Prob. 22PCh. 14 - Prob. 23P
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