Homework Answers
IF expected return on assets is equal to expected return on assets, then it can be assumed that the firm is financed entirely with equity and no debt and that it uses no financial leverage.
Answer is Firm has no debt in its capital structure
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2 points OOOO Suppose a firm's expected return on equity is at the same level compared...
Arbitra Inc.'s current capital structure is 30% debt and 70% equity. The expected return on its...
Arbitra Inc.'s current capital structure is 30% debt and 70% equity. The expected return on its debt is 5%, its equity Beta is 1.1. The riskfree rate is 2%, and the expected return on the market is 10%. Consider now the following additional information. The government of Bigland, where Arbitra Inc. is located, introduces a 40% corporate income tax rate. Arbitra Inc. (capital structure still 50% debt and 50% equity) has only one project which is expected to generate $1000...
Q1. Firm XYZ is currently financed entirely with equity. The market value of the firm's assets...
Q1. Firm XYZ is currently financed entirely with equity. The market value of the firm's assets and equity is ?? = ?? = 500, and the expected return on the firm's assets and equity is ?? = ?? = 12.5 percent. Suppose the firm issues debt with a value of ? = 200, and uses the proceeds to retire equity. The market value of the firm remains the same, ?? = ?? + ? = 500. If the expected return...
Terms Descriptions The level and nature of risk attributable to a firm's activities and operation...
Terms Descriptions The level and nature of risk attributable to a firm's activities and operations, and ignoring the risks associated with the firm's capital structure The situation in which managers have different, and usually better, information about their firm's past, current, and future conditions and prospects, compared to outsiders, such as external investors, creditors, suppliers, and customers A firm's use of relatively high fixed, as opposed to variable, operating costs, such as capital-intensive productive processes instead of labor-intensive methods This...
The Donald Grump Corporation, a publicly traded REIT, has expected total return to equity of 13%,...
The Donald Grump Corporation, a publicly traded REIT, has expected total return to equity of 13%, average interest rate on its debt of 7.5%, and a debt/total asset value ratio of 40%. What is Grump’s equity average cost of capital? 12 points. What is Grump’s firm-level overall average cost of capital? 12 points.
Hardmon Enterprises is currently an all-equity firm with an expected return of 12%. It is considering...
Hardmon Enterprises is currently an all-equity firm with an expected return of 12%. It is considering a leveraged recapitalization in which it would borrow and repurchase existing shares. a. Suppose Hardmon borrows to the point that its debt-equity ratio is 0.50. With this amount of debt, the debt cost of capital is 5%. What will the expected return of equity be after this transaction? b. Suppose instead Hardmon borrows to the point that its debt-equity ratio is 1.50. With this...
Hardmon Enterprises is currently an all-equity firm with an expected return of 14.3%. It is considering...
Hardmon Enterprises is currently an all-equity firm with an expected return of 14.3%. It is considering a leveraged recapitalization in which it would borrow and repurchase existing shares. Assume perfect capital markets. a. Suppose Hardmon borrows to the point that its debt-equity ratio is 0.50. With this amount of debt, the debt cost of capital is 4%. What will be the expected return of equity after this transaction? b. Suppose instead Hardmon borrows to the point that its debt-equity ratio...
rdmon Enterprises is currently an all-equity firm with an expected return of 3.5% t is considering...
rdmon Enterprises is currently an all-equity firm with an expected return of 3.5% t is considering a leveraged recapitalization in which would borrow and repurchase existing shares. Assume perfect capital markets. a. Suppose Hardmon borrows to the point that its debt-equity ratio is 0.50 with this amount of debt, the debt cost of capital is 6%. What will be the expected return of equity after this transaction? b. Suppose instead Hardmon borrows to the point that its debt-equity ratio is...
Arbitra Inc.'s current capital structure is 30% debt and 70% equity. The expected return on its...
Arbitra Inc.'s current capital structure is 30% debt and 70% equity. The expected return on its debt is 5%, its equity Beta is 1.1. The riskfree rate is 2%, and the expected return on the market is 10%. Consider first (in questions (i) and (ii)) the case of perfect capital markets. a) Calculate Arbitra Inc.'s asset Beta and its cost of capital (that is, Arbitra Inc.'s expected return on assets). b) Arbitra Inc. now decides to change its capital structure...
Which of the following is TRUE? I. With perfect capital markets, a firm's WACC is independent...
Which of the following is TRUE? I. With perfect capital markets, a firm's WACC is independent of its capital structure and is equal to its equity cost of capital if the firm is unleveraged. II. Given a 35% corporate tax rate, for every £1 in new permanent debt that the firm issues, the value of the firm increases by £0.35. III. A key assumption of MM's Proposition I without taxes is that individuals can borrow on their own account at...
Respecfully--Please answer all if you are willing to help. This is over MM propositions anf optimal...
Respecfully--Please answer all if you are willing to help. This is
over MM propositions anf optimal capital structure theories
QUESTION 1 With perfect capital markets, because different choices of capital structure offer a benefit to investors, the capital structure affects the value of a firm. True False QUESTION 2 Under the assumptions of Modigliani and Miller, a firm's value does not depend on the fraction of its financing that it raises from debt holders vs. equity holders. True False QUESTION...
Arbitra Inc.'s current capital structure is 30% debt and 70% equity. The expected return on its debt is 5%, its equity Beta is 1.1. The riskfree rate is 2%, and the expected return on the market is 10%. Consider now the following additional information. The government of Bigland, where Arbitra Inc. is located, introduces a 40% corporate income tax rate. Arbitra Inc. (capital structure still 50% debt and 50% equity) has only one project which is expected to generate $1000...
Terms Descriptions The level and nature of risk attributable to a firm's activities and operations, and ignoring the risks associated with the firm's capital structure The situation in which managers have different, and usually better, information about their firm's past, current, and future conditions and prospects, compared to outsiders, such as external investors, creditors, suppliers, and customers A firm's use of relatively high fixed, as opposed to variable, operating costs, such as capital-intensive productive processes instead of labor-intensive methods This...
Hardmon Enterprises is currently an all-equity firm with an expected return of 14.3%. It is considering a leveraged recapitalization in which it would borrow and repurchase existing shares. Assume perfect capital markets. a. Suppose Hardmon borrows to the point that its debt-equity ratio is 0.50. With this amount of debt, the debt cost of capital is 4%. What will be the expected return of equity after this transaction? b. Suppose instead Hardmon borrows to the point that its debt-equity ratio...
rdmon Enterprises is currently an all-equity firm with an expected return of 3.5% t is considering a leveraged recapitalization in which would borrow and repurchase existing shares. Assume perfect capital markets. a. Suppose Hardmon borrows to the point that its debt-equity ratio is 0.50 with this amount of debt, the debt cost of capital is 6%. What will be the expected return of equity after this transaction? b. Suppose instead Hardmon borrows to the point that its debt-equity ratio is...
Arbitra Inc.'s current capital structure is 30% debt and 70% equity. The expected return on its debt is 5%, its equity Beta is 1.1. The riskfree rate is 2%, and the expected return on the market is 10%. Consider first (in questions (i) and (ii)) the case of perfect capital markets. a) Calculate Arbitra Inc.'s asset Beta and its cost of capital (that is, Arbitra Inc.'s expected return on assets). b) Arbitra Inc. now decides to change its capital structure...
Respecfully--Please answer all if you are willing to help. This is
over MM propositions anf optimal capital structure theories
QUESTION 1 With perfect capital markets, because different choices of capital structure offer a benefit to investors, the capital structure affects the value of a firm. True False QUESTION 2 Under the assumptions of Modigliani and Miller, a firm's value does not depend on the fraction of its financing that it raises from debt holders vs. equity holders. True False QUESTION...
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