Reference no: EM133067962

1. A firm is considering two different financing capital structures (CS1 and CS2). In the first capital structure CS1 the firm will issue equity which will pay expected dividends of $2 million every year perpetually, and debt of maturity 10 years that will pay expected coupons of $3 million annually (6% of facevalue of $50 million). The equity is discounted at a rate of 9.40% annually, and the debt is discounted a rate of 6% annually.

In the second capital structure the firm will issue equity which will pay expected dividends of $4 million every year perpetually, and debt of maturity 10 years that will pay coupons of $1 million annually (8% of facevalue of $ 12.5 million). The debt is discounted a rate of 8% annually. What is the rate of discount for equity in CS2?

Assume that Modigliani-Miller and its assumptions are true.

Please express your answer as a percentage.

2. The current value of a firm is 65,600 dollars and it is 100% equity financed. The firm is considering restructuring so that it is 60% debt financed. If the firm's corporate tax rate is 0.4, the typical personal tax rate of an investor in the firm's stock is 0.2, and the typical tax rate for an investor in the firm's debt is 0.7 what will be the new value of the firm under the MM theory with corporate taxes but no possibility of bankruptcy.