MODIGLIANI & MILLER PROPOSITIONS A certain firm with no debt that operates in perfect capital markets currently generates a 7.5% return for its shareholders and can issue debt at a cost of 5%. Determine the firm's ROE at the following debt-to-equity ratios: 0.5, 1.0, and 1.5.
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MODIGLIANI & MILLER PROPOSITIONS A certain firm with no debt that operates in perfect capital markets currently generates a 7.5% return for its shareholders and can issue debt at a cost of 5%. Determine the firm's
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- The Rivoli Company has no debt outstanding, and its financial position is given by the following data: What is Rivoli’s intrinsic value of operations (i.e., its unlevered value)? What is its intrinsic stock price? Its earnings per share? Rivoli is considering selling bonds and simultaneously repurchasing some of its stock. If it moves to a capital structure with 30% debt based on market values, its cost of equity, rs, will increase to 12% to reflect the increased risk. Bonds can be sold at a cost, rd, of 7%. Based on the new capital structure, what is the new weighted average cost of capital? What is the levered value of the firm? What is the amount of debt? Based on the new capital structure, what is the new stock price? What is the remaining number of shares? What is the new earnings per share?A certain firm with no debt that operates in perfect capital markets currently generates a 4.5% return for its shareholders and can issue a debt cost of 3%. Determine the firm’s ROE at the following debt-to-equity ratios: D/E ratio .5 ROE = ________________________________ D/E ratio 1.0 ROE = ________________________________ D/E ratio 1.5 ROE = ________________________________ABC company and XYZ company have identical assets and currently they both have a debtequity ratio of 1. Both companies have a cost of riskless debt of 4% and return on equity of 20%. Expectedrate of return on market portfolio is 14% and firms are not subject to any taxes in this economy.a) ABC company decides to change its debt-equity ratio to 0.5 by issuing equity and retiring debt. Whatis its cost of equity after capital restructuring?b) XYZ company decides to change its debt-equity ratio to 2 by issuing debt and retiring equity. At thispoint, debt becomes risky and has a beta of 0.54, What is its cost of equity after capital restructuring? (Hint: You can use CAPM to estimate cost of riskydebt)
- Coxx, Inc., has a debt-value ratio of 0.75. The firm’s weighted average cost of capital is 12 percent, and its current cost of equity is 18 percent. Coxx has no preferred stocks in its capital structure. The tax rate is 40 percent. What is the company’s before-tax cost of debt? Group of answer choices 10% 11% 16.67% 13.1%Blitz Industries has a debt-equity ratio of 1.7. Its WACC is 8.1 percent, and its cost of debt is 5.7 percent. The corporate tax rate is 23 percent. a. What is the company’s cost of equity capital? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What is the company’s unlevered cost of equity capital? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) c-1. What would the cost of equity be if the debt-equity ratio were 2? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) c-2. What would the cost of equity be if the debt-equity ratio were 1.0? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) c-3. What would the cost of equity be if the debt-equity ratio were zero? (Do not round intermediate…Blitz Industries has a debt-equity ratio of 1.2. Its WACC is 7.4 percent, and its cost of debt is 5.1 percent. The corporate tax rate is 22 percent. a. What is the company’s cost of equity capital? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What is the company’s unlevered cost of equity capital? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) c-1. What would the cost of equity be if the debt-equity ratio were 2? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) c-2. What would the cost of equity be if the debt-equity ratio were 1.0? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) c-3. What would the cost of equity be if the debt-equity ratio were zero? (Do not round intermediate…
- Kose, Inc., has a target debt-equity ratio of 1.31. Its WACC is 8.1 percent, and the tax rate is 22 percent. a. If the company’s cost of equity is 12 percent, what is its pretax cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. If instead you know that the aftertax cost of debt is 5.8 percent, what is the cost of equity? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)Lamont Corp. is debt-free and has a weighted average cost of capital of 12.7 percent. The current market value of the equity is $2.3 million and there are no taxes. According to M&M Proposition I, what will be the value of the company if it changes to a debt-equity ratio of .85?LuLu In. wants to utilize a different debt-equity ratio than it had previously. It is planning to increase the firm’s current debt-equity ratio of 0.4 to a higher value of 0.8 by issuing debt to repurchase a portion of its common stock. LuLu In. currently has $12 million worth of debt outstanding and faces a pretax cost of debt of 8 percent per year. The firm expects to have an EBIT of $3.6 million per year in perpetuity and pays no taxes. Use the Modigliani and Miller propositions to determine the expected rate of return on the firm’s equity after the issue is announced.
- Ursala, Incorporated, has a target debt-equity ratio of 1.20. Its WACC is 8.7 percent, and the tax rate is 25 percent. a. If the company’s cost of equity is 13 percent, what is its pretax cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. If instead you know that the aftertax cost of debt is 5.8 percent, what is the cost of equity?Shadow Corp. has no debt but can borrow at 7.9 percent. The firm's WACC is currently 9.7 percent, and the tax rate is 23 percent. a. c. What is the firm's cost of equity? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. If the firm converts to 35 percent debt, what will its cost of equity be? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) If the firm converts to 50 percent debt, what will its cost of equity be? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) d-1. If the firm converts to 35 percent debt, what will the company's WACC be? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) d-2. If the firm converts to 50 percent debt, what will the company's WACC be? (Do not round intermediate calculations and…Starset, Incorporated, has a target debt-equity ratio of 0.76. Its WACC is 10.5 percent, and the tax rate is 32 percent. If the company's cost of equity is 14.5 percent, what is the pretax cost of debt? If instead you know that the aftertax cost of debt is 6.7 percent, what is the cost of equity?
