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perfect capital markets



perfect capital markets 1. (Point values are as listed) Use the following information for the next several questions. Consider a world of perfect capital markets. This world has no corporate or personal taxes, all investors have homogeneous expectations, no bankruptcy costs, and M&M’s no-tax theory of capital structure is true. Company Y is financed has the following market value balance sheet: Assets = $355 Liabilities = $81 Equity = $274 The firm had $31.95 in EBIT last year. The firm has 50 shares outstanding. The firm expects this same return for the foreseeable future. The firm 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 total assets. The firm’s liabilities consists entirely of perpetual debt. The firm’s debt is risk-less, perpetual, selling at par, and has a 4% yield. If the firm were to change its capital structure, new debt would still have a 4% yield. The expected return on the market is 9%. Given this information, answer the following questions: a. (3 points) What is the firm’s return on equity? b. (3 points) What is the firm’s current weighted average cost of capital. c. (3 points) What is the current price per share? d. (3 points) What is the beta of the firm’s levered equity? Now assume that the above firm issues enough equity to repurchase all of the firm’s debt. This change in capital structure reveals no new information about future firm prospects. e. (3 points) What is the overall firm’s new return on equity? f. (3 points) What is the firm’s new unlevered equity beta? Business Management Assignment Help, Business Management Homework help, Business Management Study Help, Business Management Course Help


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