Interest and Risk-free Rate

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Assignment 9

The due date for this quiz is Mon 16 Sep 2013 6:30 PM IST (UTC +0530).

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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

Question 8
(10 points) Mango, Inc. has had debt with market value of $1 million that has paid a 6% coupon and has had an expiration date that is far, far away. The expected annual earnings before interest and taxes for the firm are $2 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 20%, 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

Question 9
(15 points) Suppose all investors are risk-averse and hold diversified portfolios. You are evaluating a new drug company that is going to have two divisions: an R&D unit and a Sales unit. Your CEO and you are arguing about whether the two units should have the same cost

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