Q8a
Which one of the following statements is correct?
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To maximize the value of a firm you need to maximize the firm’s WACC. |
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A Chapter 7 bankruptcy is a legal process for reorganizing a firm. |
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Investors can use homemade leverage to offset firm leverage. |
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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.
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$5.20 million |
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$5.98 million |
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$6.50 million |
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$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?
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15.3% |
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18.2% |
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23.1% |
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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.)
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$2.05 million |
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$2.23 Million |
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$2.56 Million |
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$2.85 Million |
5. From Question 4, what is the levered value of the firm (in millions)?_______
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$2.05 million |
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$2.36 million |
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$2.56 million |
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$2.73 million |
