Assume a Modigliani and Miller (MM) world with perfect capital markets. Amtar Ltd starts out as an all-equity firm whose shares have an expected return of 12%. Amtar then does a leveraged recapitalization, issuing debt and repurchasing stock, until its debt- equity ratio is 0.6. Due to the increased risk after the leveraged recapitalization, shareholders now expected a return of 18%. Amtar's debt is risk-free. Amtar's cost of debt after the leveraged recapitalization is closest to: A) 8.5% В) 2.0% С) 8.0% D) 3.0%

Assume a Modigliani and Miller (MM) world with perfect capital markets. Amtar Ltd starts out as an all-equity firm whose shares have an expected return of 12%. Amtar then does a leveraged recapitalization, issuing debt and repurchasing stock, until its debt- equity ratio is 0.6. Due to the increased risk after the leveraged recapitalization, shareholders now expected a return of 18%. Amtar's debt is risk-free. Amtar's cost of debt after the leveraged recapitalization is closest to: A) 8.5% В) 2.0% С) 8.0% D) 3.0%

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter15: Capital Structure Decisions

Section: Chapter Questions

Problem 10MC: Liu Industries is a highly levered firm. Suppose there is a large probability that Liu will default...

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