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1. Consider two firms with identical assets. Company A is all equity financed and company B is financed with a mix of debt and equity. There are also two equally likely states of the world which will occur at time 1. Company B has debt with a face value of $45,000 that is due at time 1.
Demonstrate that under the assumptions of the Modigliani-Miller theorem, VA = VB.
Market Value of Assets (T=1)
Company A
Company B
Good State
$120,000
Bad State
$30,000
Variable
Current
Proposed
Assets
$20,000
Debt
$0
$8,000
Equity
$12,000
Debt/Equity Ratio
0.00%
66.67%
Yield
N/A
8.00%
Shares Outstanding
400
240
Share Price
$50
Good
Fair
Bad
EBIT
$1,000
$2,000
$3,000
Interest
EBT
Fill out the table below that calculates operating ROA. Also, calculate "operating ROE" and EPS on an EBT basis for Company D under the new capital structure i.e. these two ratios use EBT as opposed to Net Income in the numerator.
Operating ROA
Operating ROE
EPS
Attachment:- 1612818_1_FINE-6140.pdf
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