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Unlevered Corporation (Firm U) has a total market value of $5,000,000, a tax rate of 40 percent, and earnings before interest and taxes (EBIT) of $1,000,000. Levered Corporation (Firm L) is identical in all respects to Firm U, but Firm L has $3,000,000 market (and book) value of debt outstanding. Firm L pays total annual interest of $270,000 on this debt. Both firms satisfy the MM assumptions.
a. What is the value of Firm L according to MM’s Proposition I with corporate taxes?
b. What is Firm U’s cost of equity?
c. What is Firm L’s cost of equity?
d. What is Firm L’s weighted average cost of capital?
What is a credit default swap? Explain it how works and include in your answer “credit event”, “protection” and “reference entity.” How can they be used to construct a synthetic corporate bond position? Synthetic Treasury position?
Miltmar Corporation will pay a year-end dividend of $3, and dividends thereafter are expected to grow at the constant rate of 4% per year. The risk-free rate is 5%, and the expected return on the market portfolio is 14%. The stock has a beta of 0.82...
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Which of the following statements about the future value of a dollar is true?
JPix management is considering a stock split. JPix currently sells for $65 per share, and a 3-for-2 stock split is contemplated. What will be the company's stock price following the stock split assuming that the split has no effect on the total marke..
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Since the use of financial leverage magnifies the potential returns to shareholders, investors should be willing to pay a premium for the stock of firms that have greater amounts of leverage." Do you agree or disagree with the above statement? Why?
The next year the common stock of Gold Corp. will pay a dividend of $5.82 per share. If the company is growing at a rate of 4.85 percent per year, and your required rate of return is 14.61 percent, what is Gold's company stock worth to you?
You are comparing two annuities that offer quarterly payments of $2,500 for five years and pay .75 percent interest per month. You will purchase one of these today with a single lump sum payment. These two annuities have both equal present and future..
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