1. Capital Structure and Valuation. For this and the next 2 questions: Cesar Digital Systems has EBIT of $500,000, a growth rate of 5%, and faces a tax rate of 40%. In order to support growth, Cesar must reinvest 50 percent of its EBIT in net operating assets. Cesar has $400,000 in 10% debt outstanding. A similar company with no debt has a cost of equity of 12%. (Note that this problem assumes growth in earnings, otherwise referred to as MM extension with growth.
Capital Structure and Valuation. According to the MM extension with growth, what is the firm's unlevered value?
$228,571.43
$714,285.71
$285,714.29
None of the above
2. According to Modigliani and Miller (MM)'s basic theory of capital structure, which of the following is considered when determining the value of a firm?
Retained earnings
Bankruptcy costs
Brokerage costs
Tax deductible interests
Personal income taxes