1. A firm has a debt-equity ratio of 1.0. The required return on the firm’s assets is 11.1% and the pre-tax cost of debt is 4.1%. Ignore taxes. What is the firm’s cost of equity?
a) 15.3%
b) 18.1%
c) 23.1%
d) 21.7
2. A company is an all-equity firm that has projected earnings before interest and taxes (EBIT) of $500,000 forever. The current cost of equity rs = 10% and the tax rate T = 20%. The company is in the process of issuing $1.5 million of bonds at par that carry a 6% annual coupon. What is the unlevered value of the firm (in millions)? (Note: You should use MM capital structure model with corporate taxes, but without personal taxes and bankruptcy costs. The formula for the value of unlevered firm: VU = EBIT x (1-T) / rs).
a) $4.00 million
b) $2.23 million
c) $2.86 million
d) $3.50 million
3. According to the information from Question 9, what is the levered value of the firm (in millions)? (Note: The value of levered firm VL = VU + Present value of annual interest tax shield) _______
a) $4.30 million
b) $4.70 million
c) $3.22 million
d) $5.20 million