7 Questions
Which one of the following statements is NOT correct?
“No transaction costs” is NOT one of the assumptions of Modigliani-Miller propositions.
Shadow Corp. has no debt but can borrow at 8 percent. The firm’s WACC is currently 11 percent, and the tax rate is 35 percent. If the firm converts to 25 percent debt, what will its cost of equity be?
11.65%
Shadow Corp. has no debt but can borrow at 8 percent. The firm’s WACC is currently 11 percent. If the firm converts to 25 percent debt, what will its WACC be? (Assume no corporate tax)
11%
Bruce & Co. expects its EBIT to be $185,000 every year forever. The firm can borrow at 9 percent. Bruce currently has no debt, and its cost of equity is 16 percent. If the tax rate is 35 percent, what is the value of the firm?
$751,562.50
Bruce currently has no debt, and its firm value is $751,562.50. The tax rate is 35 percent. What will the firm value be if Bruce borrows $135,000 and uses the proceeds to repurchase shares?
$798,812.50
An ungeared company has an equity value of £20m. If the tax rate is 30% and the company refinances with 40% debt, the new value of equity will be:
£14.4m
Shadow Corp. has no debt but can borrow at 8 percent. The firm’s WACC is currently 11 percent, and the tax rate is 35 percent. If the firm converts to 50 percent debt, what will its cost of equity be?
12.95%
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