Cost of equity and corporate taxes, Financial Accounting

1. Firm L has debt with a market value of $200,000 and a yield of 9%. The firm's equity has a market value of $300,000, its earnings are growing at a rate of 5%, and its tax rate is 40%. A similar firm with no debt has a cost of equity of 12%. Under the MM extension with growth, what is Firm L's cost of equity?

a. 11.4%

b. 12.0%

c. 12.6%

d. 13.3%

e. 14.0%

2.  Your firm has debt worth $200,000, with a yield of 9%, and equity worth $300,000. It is growing at a 5% rate, and its tax rate is 40%. A similar firm with no debt has a cost of equity of 12%. Under the MM extension with growth, what is the value of your firm's tax shield, i.e., how much value does the use of debt add?

a. $92,571

b. $102,857

c. $113,143

d. $124,457

e. $136,903

3. Your firm has debt worth $200,000, with a yield of 9%, and equity worth $300,000. It is growing at a 5% rate, and its tax rate is 40%. A similar firm with no debt has a cost of equity of 12%. What is the value of the firm according to MM with corporate taxes?

a. $475,875

b. $528,750

c. $587,500

d. $646,250

e. $710,875

4. Gomez computer systems has an EBIT of $200,000, a growth rate of 6%, and its tax rate is 40%. In order to support growth, Gomez must reinvest 20% of its EBIT in net operating assets. Gomez has $300,000 in 8% debt outstanding, and a similar company with no debt has a cost of equity of 11%.

According to the MM extension with growth, what is the value of Gomez's tax shield?

a. $156,385

b. $164,616

c. $173,280

d. $182,400

e. $192,000

5. Trumbull, Inc., has total value (debt plus equity) of $500 million and $200 million face value of 1-year zero coupon debt. The volatility (σ) of Trumbull's total value is 0.60, and the risk-free rate is 5%. Assume that N(d1) = 0.9720 and N(d2) = 0.9050.

What is the value (in millions) of Trumbull's equity if it is viewed as an option?

a. $228.77

b. $254.19

c. $282.43

d. $313.81

e. $345.19

Posted Date: 2/16/2013 8:07:04 AM | Location : United States







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