seven7Which one of the following statements is correct?
To maximize the value of a firm you need to maximize the firm’s WACC. | ||
A Chapter 7 bankruptcy is a legal process for reorganizing a firm. | ||
Investors can use homemade leverage to offset firm leverage. | ||
To maximize the value of a firm you need to borrow as much as you can. |
2. A firm has 100,000 shares of stock outstanding. The firm is considering borrowing $1.3 million at 7.5% interest and using the loan proceeds to repurchase 25,000 shares of stock. What is the value of the firm? Ignore taxes.
$5.20 million | ||
$5.98 million | ||
$6.50 million | ||
$7.25 million |
3. A firm has a debt-equity ratio of 1.0. The required return on the firm’s assets is 16.1% and the pre-tax cost of debt is 9.1%. Ignore taxes. What is the firm’s cost of equity?
15.3% | ||
18.2% | ||
23.1% | ||
21.7% |
4. 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 is 15% and the tax rate is 33%. 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.)
$2.05 million | ||
$2.23 Million | ||
$2.56 Million | ||
$2.85 Million |
5. From Question 4, what is the levered value of the firm (in millions)?_______
$2.05 million | ||
$2.36 million | ||
$2.56 million | ||
$2.73 million |
11 years ago
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