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Before Pay Inc. (BPI) currently has an ROE of 10%, total assets of $1000 and a dividend payout ratio of 100%. BPI's beta is currently equal to 1 and they have no debt. The marginal corporate income tax rate is equal to 0%. The long-term risk free rate is currently equal to 3% and the expected stock market risk premium is equal to 7%. If BPI increase their debt-to-equity ratio to 3 with an after-tax cost of debt equal to 3% and simultaneously reduce their dividend payout ratio to 50% then BPI's new intrinsic value of equity will be equal to:   a) $500 b) $250 c) $1000 d) $333

Before Pay Inc. (BPI) currently has an ROE of 10%, total assets of $1000 and a dividend payout ratio of 100%. BPI's beta is currently equal to 1 and they have no debt. The marginal corporate income tax rate is equal to 0%. The long-term risk free rate is currently equal to 3% and the expected stock market risk premium is equal to 7%. If BPI increase their debt-to-equity ratio to 3 with an after-tax cost of debt equal to 3% and simultaneously reduce their dividend payout ratio to 50% then BPI's new intrinsic value of equity will be equal to:   a) $500 b) $250 c) $1000 d) $333

EBK CFIN
EBK CFIN
6th Edition
ISBN:9781337671743
Author:BESLEY
Publisher:BESLEY
Chapter16: Financial Planning And Control
Section: Chapter Questions
Problem 13PROB
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Q. 13 Before Pay Inc. (BPI) currently has an ROE of 10%, total assets of $1000 and a dividend payout ratio of 100%. BPI's beta is currently equal to 1 and they have no debt. The marginal corporate income tax rate is equal to 0%. The long-term risk free rate is currently equal to 3% and the expected stock market risk premium is equal to 7%. If BPI increase their debt-to-equity ratio to 3 with an after-tax cost of debt equal to 3% and simultaneously reduce their dividend payout ratio to 50% then BPI's new intrinsic value of equity will be equal to:

 

a) $500
b) $250
c) $1000
d) $333
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