It is not correct to discount the cash flows of an unlevered firm with the cost...
It is not correct to discount the cash flows of an unlevered firm with the cost of equity of the levered firm because ________.
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leverage decreases the risk of the firm’s equity |
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leverage increases the risk of the firm’s equity |
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leverage changes the unlevered cost of equity |
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cost of debt decreases in this setting |
Homework Answers
Ans leverage increases the risk of the firm’s equity
It is not correct to discount the cash flows of an unlevered firm with the cost of equity of the levered firm because leverage increases the risk of the firm’s equity.
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It is not correct to discount the cash flows of an unlevered
firm with the cost...
John invested in North Point stock when the firm was unlevered. After that, North Point has...
John invested in North Point stock when the firm was unlevered. After that, North Point has changed its capital structure. The firm now has a debt ratio of.35. To unlever his position, John has to Multiple Choice o borrow some money and purchase additional shares of North Point stock borrow some m o C ) maintain his current equity position as the debt of the firm does not affect him personally o sell 35 percent of his shares of North...
1. Night Inc. has unlevered cash flows of $1,470,000 each year in perpetuity. The unlevered cost...
1. Night Inc. has unlevered cash flows of $1,470,000 each year in perpetuity. The unlevered cost of capital (ru) is 14%. The firm plans to issue $6 million in perpetual debt with a return of 8% (to repurchase stock). The tax rate is 25%. If the value of the levered firm is $11,500,000, use the trade-off theory to find the present value of the financial distress costs. Unless stated otherwise, compounding is annual and payments occur at the end of...
An unlevered firm has a weighted average cost of capital of 15 percent. The current market...
An unlevered firm has a weighted average cost of capital of 15 percent. The current market value of the unlevered firm $250 million. Assuming a perfect capital market and according to M&M Proposition I, what will be the value of the levered company if it changes to a debt-equity ratio of 1? A) $125 B) $168.75 C) $206.25 D) $250 E) $293.75
An unlevered firm has a weighted average cost of capital of 14 percent. The current market...
An unlevered firm has a weighted average cost of capital of 14 percent. The current market value of the unlevered firm $250 million. Assuming a perfect capital market and according to M&M Proposition I, what will be the value of the levered company if it changes to a debt-equity ratio of 1? A) $125 B) $168.75 C) $206.25 D) $250 E) $293.75
The cost of equity capital for an unlevered firm is 18%, the corporate tax rate is...
The cost of equity capital for an unlevered firm is 18%, the corporate tax rate is 30% and the cost of debt is 6%. What is the cost of equity capital for a levered firm with a debt-to-equity ratio of 1:4? a) 21.15% b)18.90% c)19.05% d)20.10%
Unlevered firm Levered firm EBIT 10000 10000 Interest 0 3200 Taxable income 10000 6800 Tax (tax rate: 34%) 3400 2312 Net income 6600 4488 CFFA 6600 7688 The fir...
Unlevered firm Levered firm EBIT 10000 10000 Interest 0 3200 Taxable income 10000 6800 Tax (tax rate: 34%) 3400 2312 Net income 6600 4488 CFFA 6600 7688 The firm is originally 100% financed by equity (Unlevered firm). Assuming that cost of debt =8%; unlevered cost of capital =10%; tax rate= 34%; systematic risk of the asset is 2. Assuming that the firm issues $ 40,000 to buy back some shares, and the debts are traded at par value. a) What...
Compton Corporation currently has no debt in its capital structure. As an unlevered firm, its cost...
Compton Corporation currently has no debt in its capital structure. As an unlevered firm, its cost of equity is 13 percent. It is considering substituting $8,000 in debt at 6 percent interest. The EBIT for the firm is $5,000 under either scenario, and the tax rate is 35 percent. Unlevered Firm $ 5,000 EBIT Interest EBT Taxes (.35) Net Income Levered Firm $5,000 480 4,520 5,000 1,750 3,250 1,582 2,938 Calculate the cost of equity and the WACC for the...
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...
Consider a project with free cash flows in one year of $132,459 in a weak market...
Consider a project with free cash flows in one year of $132,459 in a weak market or $193,776 in a strong market, with each outcome being equally likely. The initial investment required for the project is $60,000, and the project's unlevered cost of capital is 22%. The risk-free interest rate is 3%. (Assume no taxes or distress costs.) a. What is the NPV of this project? b. Suppose that to raise the funds for the initial investment, the project is...
An unlevered firm has a weighted average cost of capital of (10+x) percent. The current market...
An unlevered firm has a weighted average cost of capital of (10+x) percent. The current market value of the unlevered firm $250 million. Assuming a perfect capital market and according to M&M Proposition I, what will be the value of the levered company if it changes to a debt-equity ratio of 1? let x=1 A) $125 B) $168.75 C) $206.25 D) $250 E) $293.75
John invested in North Point stock when the firm was unlevered. After that, North Point has changed its capital structure. The firm now has a debt ratio of.35. To unlever his position, John has to Multiple Choice o borrow some money and purchase additional shares of North Point stock borrow some m o C ) maintain his current equity position as the debt of the firm does not affect him personally o sell 35 percent of his shares of North...
Compton Corporation currently has no debt in its capital structure. As an unlevered firm, its cost of equity is 13 percent. It is considering substituting $8,000 in debt at 6 percent interest. The EBIT for the firm is $5,000 under either scenario, and the tax rate is 35 percent. Unlevered Firm $ 5,000 EBIT Interest EBT Taxes (.35) Net Income Levered Firm $5,000 480 4,520 5,000 1,750 3,250 1,582 2,938 Calculate the cost of equity and the WACC for the...
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...
Consider a project with free cash flows in one year of $132,459 in a weak market or $193,776 in a strong market, with each outcome being equally likely. The initial investment required for the project is $60,000, and the project's unlevered cost of capital is 22%. The risk-free interest rate is 3%. (Assume no taxes or distress costs.) a. What is the NPV of this project? b. Suppose that to raise the funds for the initial investment, the project is...
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