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Company A and Company B are identical except for capital structures. Company A has 80 percent debt and 20 percent equity financing, whereas Company B is all equity financed with 8,000,000 capital structure. The borrowing rate of debt for both companies is 5 percent and capital markets are assumed to be perfect.
a. Company A has net operating income of $400,000 and the overall capitalization rate of the company, ko is 16 percent. If you own 10 percent of the common stock of Company A, what is the implied equity capitalization rate, ke and your net dollar return?
b. If Company B goes for financing with $4000000 debt. Find the value of levered firm of company B with tax shield benefit of 35% and bankruptcy cost of $500000?
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Start-up or emerging growth companies are advised to seek equity financing, not debt financing. Companies should always avoid debt financing.
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what are the risk versus return and doing business in Saudi Arabia.
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