Firms A and B are identical except for their capital structure: A is fully equity financed, while B carries £50m of debt on which it pays 59% interest. Both firms are projected to generate annual cash flows of £10m in perpetuity. A's cost of capital is 10%. Assume perfect capital markets and no taxes. In the absence of arbitrage opportunities, what is the value of firm B's equity and its cost of equity capital? O £100m and 1096 O £50m and 156 O £150m and 1096 O £100m and 5%

Firms A and B are identical except for their capital structure: A is fully equity financed, while B carries £50m of debt on which it pays 59% interest. Both firms are projected to generate annual cash flows of £10m in perpetuity. A's cost of capital is 10%. Assume perfect capital markets and no taxes. In the absence of arbitrage opportunities, what is the value of firm B's equity and its cost of equity capital? O £100m and 1096 O £50m and 156 O £150m and 1096 O £100m and 5%

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter17: Dynamic Capital Structures And Corporate Valuation

Section: Chapter Questions

Problem 1P

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Firms A and B are identical except for their capital structure: A is fully equity financed, while B carries £50m of debt on which it pays 5% interest. Both firms are projected to generate annual cash flows of £10m in perpetuity. A's cost of capital is 10%. Assume perfect capital markets and no taxes. In the absence of arbitrage opportunities, what is the value of firm B's equity and its cost of equity capital? £100m and 10% £50m and 15% £150m and 10% £100m and 5%
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