A firm has zero debt in its capital structure and has an overall cost of capital of 10 percent. The firm is considering a new capital structure with 60 percent debt at an interest rate of 8 percent. Assuming there are no taxes or other imperfections, what would be the cost of equity with the new capital structure?
10%
11%
14%
13%
9%
L.A. Clothing has expected earnings before interest and taxes of $1,900, an unlevered cost of capital of 13 percent and a tax rate of 35 percent. The company also has $2,700 of debt that carries a 7 percent coupon. The debt is selling at par value. What is the value of this firm?
$9,400.50
$12,534.00
$13,578.50
$10,445.00
$11,489.50
An overconfident investor will tend to:
underperform due to excess trading.
suffer from the disposition effect.
underestimate their ability to pick a winning stock.
trade primarily in securities from their local area.
trade less frequently than an average investor.
Southern Home Cookin' just paid its annual dividend of $.70 a share. The stock has a market price of $28 and a beta of 0.9. The return on the U.S. Treasury bill is 3 percent and the market risk premium is 11 percent. What is the cost of equity?
12.90 percent
14.62 percent
8.94 percent
10.37 percent
16.50 percent
A beta coefficient reflects the response of a security’s return to:
the risk-free rate.
an unsystematic risk.
the market rate of return.
idiosyncratic risk.
a systematic risk.
The proposition that the value of the firm is independent of its capital structure is called:
the capital asset pricing model.
MM Proposition I (no taxes).
the law of one price.
the efficient markets hypothesis.
MM Proposition II (no taxes).