Firms a and b are identical except for their capital

Assignment Help Corporate Finance

Reference no: EM13380951

Firms A and B are identical except for their capital structure. A carries no debt, whereas B carries £200 of debt on which it pays 6% interest rate. Assume no transaction costs, no taxes, risk-free debt and perfect capital markets. The relevant numbers are provided in the following table:

	A	B
Value of Firm	300(given)	400(given)
Debt	0(given)	200(given)
Equity	300	200
Earnings before interest	30(given)	30(given)
Interest payment	0	12
Interest rate	Not Applicable(given)	6%(given)
Earnings after interest	30	18
Return on Equity	10%	9%
Debt/Equity Ratio	0	1
Cost of Capital	10%	7.5%

Complete the blank spaces in the table above.
State whether each of the following statements is true or false

i. To reduce the company's cost of capital, the management of Company A should start a programme of stock repurchases financed through the issue of new debt.

ii. To reduce the company's cost of capital, the management of Company B should issue equity to reduce its debt burden.

iii. Relative to Company B, Company A is undervalued.

iv. The situation described in the table is the result of capital markets equilibrium.

v. The situation described in the table violates Modigliani-Miller Proposition 1.

Reference no: EM13380951

Questions Cloud

In 1895 the first us open golf championship was held the : in 1895 the first u.s. open golf championship was held. the winners prize money was 150. in 2006 the winners check was

An investor is uncertain about how much to invest in two : an investor is uncertain about how much to invest in two risky assets. the first asset equity yields an expected return

21st century cat is a film producing company which is : 21st century cat is a film producing company which is contemplating the production of a new film. they estimate thatthe

An investor is uncertain about how much to invest in two : an investor is uncertain about how much to invest in two risky assets. the first asset equity yields an expected return

Firms a and b are identical except for their capital : firms a and b are identical except for their capital structure. a carries no debt whereas b carries pound200 of debt on

Laptop plc is planning on setting up a laptop repair centre : laptop plc. is planning on setting up a laptop repair centre. they estimate thatthe required investment will be

1 explain the process of financial planning used to : 1. explain the process of financial planning used to estimate asset investment requirements for a corporation. explain

Question 1james and john can afford to invest 6000 annually : question 1.james and john can afford to invest 6000 annually in a fund that earns 3 compounded annually.nbspnbspnbspa

Barbow enterprises inc is considering an expansion in their : barbow enterprises inc. is considering an expansion in their operations. one of the first items they want to examine is

User Account

All Pages