Question

Assume that Modigliani and Miller’s perfect capital markets assumptions hold and there are no corporate taxes....

Assume that Modigliani and Miller’s perfect capital markets assumptions hold and there are no corporate taxes. A company’s cost of debt is 10%, its cost of equity is 25% and its debt-to-equity ratio is 25%

Assume that the riskfree rate is 10% and the market risk premium is 7.5%. How has the company’s equity beta changed with the debt-to-equity ratio changing from 25% to 50%? Show your calculations.

Business   Accounting   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Assume that Modigliani and Miller’s perfect capital markets assumptions hold and there are no corporate taxes....
Assume that Modigliani and Miller’s perfect capital markets assumptions hold and there are no corporate taxes. A company’s cost of debt is 10%, its cost of equity is 25% and its debt-to-equity ratio is 25%. How would the cost of equity change if the company’s debt-to-equity ratio rises to 50%? Show your calculations.
In perfect and complete markets Miller and Modigliani (1958) show that there is no advantage to...
In perfect and complete markets Miller and Modigliani (1958) show that there is no advantage to debt vs equity in the capital structure. That is, the value of the firm is determined by its income from operations, not from its capital structure. What do Miller and Modigliani mean by perfect and complete markets? How did their argument change with the introduction of corporate taxes into their model?
In perfect and complete markets Miller and Modigliani (1958) show that there is no advantage to...
In perfect and complete markets Miller and Modigliani (1958) show that there is no advantage to debt vs equity in the capital structure.  That is, the value of the firm is determined by its income from operations, not from its capital structure. What do MM mean by perfect and complete markets? How did their argument change with the introduction of corporate taxes into their model?
Assume we are in an otherwise perfect, frictionless world with corporate taxes. Firm X has a...
Assume we are in an otherwise perfect, frictionless world with corporate taxes. Firm X has a debt-to-equity ratio of 2.25, its cost of equity is 12%, and its cost of debt is 6%. The corporate tax rate is 35%. If the firm converts to a debt-to-equity ratio of 1.25, what will its new WACC be?
______     3.      If markets are perfect (and using the other assumptions in Miller and Modigliani (1961)),...
______     3.      If markets are perfect (and using the other assumptions in Miller and Modigliani (1961)), stock prices should fall by the amount of a cash dividend. If so, can a firm make its stockholders wealthier by changing (i.e., increasing or decreasing) its dividend? A. No, under these assumptions, a firm cannot make its stockholders wealthier by changing its dividend. B. Yes, under these assumptions, a firm can make its stockholders wealthier, but only by increasing its dividend. C. Yes,...
Discuss Modigliani and Miller's Propositions I and II in a perfect world without taxes nor distress...
Discuss Modigliani and Miller's Propositions I and II in a perfect world without taxes nor distress costs. List the basic assumptions, results, and intuition of the model. Based on this model, if the original unlevered firm value is $100 million and the CFO is planning to carry out a leveraged recapitalization to a debt equity ratio of 1:1. What’s the levered firm value? If the unlevered equity requires 10% annual return and the debt requires a 6% of annual return,...
For firms with relatively high levels of debt in perfect capital markets (no taxes, no costs...
For firms with relatively high levels of debt in perfect capital markets (no taxes, no costs of financial distress), the cost of capital is closer to the cost of debt capital than to the cost of equity capital. True False
Luna Corporation has a beta of 1.5, £10 billion in equity, and £5 billion in debt...
Luna Corporation has a beta of 1.5, £10 billion in equity, and £5 billion in debt with an interest rate of 4%. Assume a risk-free rate of 0.5% and a market risk premium of 6%. Calculate the WACC without tax. Queen Corporation has a debt-to-equity ratio of 1.8. If it had no debt, its cost of equity would be 16%. Its current cost of debt is 10%. What is the cost of equity for the firm if the corporate tax...
Assume perfect capital markets. The table below gives the probability distributions of a share of the...
Assume perfect capital markets. The table below gives the probability distributions of a share of the Omega corporation and the broad stock market. State S1 S2 S3 Probability 25% 50% 25% Omega -4% 1% 10% Market -3% 2% 5% What is the expected return on the Omega share and on the Broad stock Market? What is the risk (standard deviation) of the Omega share and the risk (standard deviation) of the Market? What is the market beta of the Omega...
Assume a world in which the assumptions of the capital asset pricing model (CAPM) hold. A...
Assume a world in which the assumptions of the capital asset pricing model (CAPM) hold. A company can invest in a project which costs today $5,000, in one year delivers $2,000 with certainty and in two years delivers -$1,000 with a probability of 25% and $8,000 with a probability of 75%. Suppose the annual risk free rate is 3%, the expected return on the market is 10% and the project’s market beta is 1.5. Should the company invest in the...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT