1. A company has equity with a market value of $20 million and debt with a
market value of 10 million. The cost of the debt is 14 percent per
annum. Treasury bills that mature one year yield 8 percent annum, and
the expected return on the market portfolio over the next year is 18
percent. Firms pay no taxes. What is debt-equity ratio? weighted
average cost of capital? What is the cost of capital for an ohterwise
identical equity firm?
A firm is currently an all equity firm that pays no taxes. The market
value of the firm's equity is $2 million. The cost of this unlevered
equity is 18% per annum. The firm plans to issue $400,000 in debt and
use the proceeds to repurchase stock. The cost of debt is 10% per
annum. a) after the frim repuchases the stock what will the firm's
weighted average cost of capital be? b) After the repurchase, what
will the cost of equity be? explain. c) Use you r answer to b) to
compare the firm's weighted average cost of capital after the
repurchase. Is this answer consistent with a)?
3. A firm plans to issue $5 million of perpetual bonds. The face value
of each bond is $1000. The annual coupon on the bonds is 12%. Market
interest rates on one year bonds are 11%. With equal probability, the
long-term market interest rates will be either 14% or 7% next year.
assume investors are risk-neutral. a) If the bonds are noncollable,
what is the price of the bonds? b) If the bonds are callable one year
from today at $1,450, will their price be greater than or less than
the price you comuted in a)? Why?
4) Present Value: Compute the present value of a $100 cash flow for
the following combinations of discount rates and times:
a) r= 8% t=10 years
b) r= 8% t=20 years
c) r= 4% t=10 years
d) r= 4% t=20 years
5. Calculating Interest Rate: Find the interest rate implies by the
following combinations or present and future value:
Present Value Years Future Value
$400 11 $684
$183 4 $249
$300 7 $300 |
