Finance and Question Essay

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Question 1
(5 points) In a world with no frictions (i.e., taxes, etc.), having debt is always better because it increases the value of the firm/project.
Your Answer Score Explanation
False. Correct 5.00 Correct. You understand the irrelevance of financing.
Total 5.00 / 5.00
Question Explanation

Fundamental question about value creation.
Question 2
(5 points) The return of equity is equal to the return on debt of a project/firm
Your Answer Score Explanation
Sometimes true.
Always true.
Never true. Correct 5.00 Correct. Equity is always riskier.
Total 5.00 / 5.00
Question Explanation

Financing's effects on equity.
Question 3
(10 points) Suppose the expected returns on equity of two
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Alpha, Inc., has debt that is viewed by the market as risk-less with a market value of $500 million. Beta, Inc., has no debt. Both firms are expected to generate cash flows of $100 million per year for the foreseeable future and the market value of the equity of Beta, Inc is $1 billion. Estimate the return on equity of Alpha, Inc. Assume there are no taxes, and the risk-free rate is 5%. (No more than two decimals in the percentage interest rate, but do not enter the % sign.)
Answer for Question 7
You entered:
Your Answer Score Explanation
20 Incorrect 0.00
Total 0.00 / 10.00
Question Explanation

A mechanical problem if you understand the effects of financing and use all information.
Question 8
(10 points) Banana, Inc. has had debt with market value of $0.5 million that has paid a 5% coupon and has had an expiration date that is far, far away. The expected annual earnings before interest and taxes for the firm are $1 million and the firm has not grown, nor does it have plans for any growth. The firm however has just raised more equity to retire all its debt. If the required rate of return to equity-holders (after the capital structure change) is now 10%, what is the market value of the firm? Assume there are no taxes. (Enter just the number without the $ sign or a comma; round to the nearest whole dollar.)
Answer for Question 8
You entered:
Your Answer Score Explanation

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