Find the new cost of equity , Finance Basics

You are interested in the value of Joes Shoe Corporation and its cost of capital. Suppose you believe that the assumptions of Miller-Modigliani's Proposition 1 (without taxes) are valid.

a. Find the new value of the company, the new cost of equity and the new weighted average cost of capital if the currently unlevered company, valued at $1,470,000 (i.e. VU) issues debt of $700,000 at a 9% interest rate. You can assume that the company uses this debt to repurchase stocks. Assume also that the initial cost of equity was 11%.

b. Consider your answer this time with a corporate tax rate of 28%. You may assume that the value of the unlevered firm is still $1,470,000 even though taxes have gone from 0 to 28%.

 

Posted Date: 3/13/2013 6:21:46 AM | Location : United States







Related Discussions:- Find the new cost of equity , Assignment Help, Ask Question on Find the new cost of equity , Get Answer, Expert's Help, Find the new cost of equity Discussions

Write discussion on Find the new cost of equity
Your posts are moderated
Related Questions
Contribution Margin The Average of the industry Contribution Margin (CM) was 15.40% for 2004, 14.39% for 2005, and 13.18% for 2006. The chart showed that Contribution Mar

Contracting Cost - Agency Costs These are costs acquired in devising the contract between the shareholders and managers. The contract is drawn to ensure management act in t

how to make a perdiem claim format to maintain the records of staff

ollowing a personal introduction, and before you begin gathering information about the clients’ existing financial situation or needs, there are certain disclosures you are require

Question 1: Consider a 5-year $10,000 endowment assurance issued to a select life aged 30 under the following bonus schemes:- (a) Simple reversionary bonuses of 5% p.a., 6%i


What is Nominal and Real Return While nominal return is the return in nominal rupees, real return is equal to the nominal return adjusted for changes in prices i.e. rate of

Illustrate the role of credit unions in depository institutions. Credit unions: Credit unions are non-profit institutions equally organised and owned through their member

Assume the managers of Fort Winston Hospital are setting the price on a new outpatient service. Here are the relevant data estimates. Variable costs $ 5.00 Annual fixed c

Question: A deferred annuity policy is sold to a life aged 45 with the following benefits: • Basic payments start at $30,000 from age 65, increasing by $2,000 each year; •