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perfect capital markets



perfect capital markets 1. Now consider a DIFFERENT COMPANY in a world that of perfect capital markets, with one change, CORPORATE TAXES DO EXIST. This world has no personal taxes, all investors have homogeneous expectations, no bankruptcy costs, and M&M’s with corporate taxes theory of capital structure is true. Company Y is financed has the following market value balance sheet: Assets = $ 110 Liabilities = $0 Equity = $110 The firm had $20 in EBIT last year. The firm has 20 shares outstanding. The firm expects the same return/profits for the foreseeable future. The firm a is a zero growth firm, that pays out all excess earnings as dividends. Any time the firm changes its capital structure, it changes only the debt/equity mix and does not change its physical/fixed assets. Liabilities consist only of the firm’s debt. The debt is riskless, perpetual, selling at par, and has a 8% pre-tax yield. If the firm were to change its capital structure, new debt would still have a 8% pre-tax yield. The firm’s tax rate is 35%. Given this information, answer the following questions: a. (3 points) What is the current weighted average cost of capital (WACC)? b. (3 points) What is the firm’s current dividends per share? Now assume the firm issue $100 in debt and repurchases $100 in equity. c. (3 points) Write out the firm’s new balance sheet after all of the changes. d. (3 points) What is the firm’s Weighted Average Cost of Capital? Business Management Assignment Help, Business Management Homework help, Business Management Study Help, Business Management Course Help


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