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WEEK 8 - CAPITAL STRUCTURE MM

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Questions and Answers

Which one of the following statements is NOT correct?

Through homemade leverage individuals can either duplicate or undo the effects of corporate leverage.

The cost of equity rises with leverage because the risk to equity rises with leverage.

Bankruptcy cost and other agency costs were not considered in Modigliani-Miller proposition.

“No transaction costs” is NOT one of the assumptions of Modigliani-Miller propositions. (correct)

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%

12.93%

11.65% (correct)

12%

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% (correct)

10.04%

9.08%

12.95%

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 Signup and view all the answers

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 Signup and view all the answers

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 Signup and view all the answers

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% Signup and view all the answers

WEEK 8 - CAPITAL STRUCTURE MM

Choose a study mode

Podcast

Questions and Answers

Which one of the following statements is NOT correct?

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?

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)

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?

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?

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:

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?

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