Identical assets that generate identical cash flows

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Reference no: EM131346631

1. A firm requires an investment of $40,000 and borrows $20,000 at 9%. If the return on equity is 19%, what is the firm's pretax WACC?

A) 7%

B) 14%

C) 19.6%

D) 16.8%

2. Consider two firms, Firm X and Firm Y, that have identical assets that generate identical cash flows. Firm Y is an all-equity firm, with 1 million shares outstanding that trade for a price of $24 per share. Firm X has 2 million shares outstanding and $12 million in debt at an interest rate of 5%. According to MM Proposition I, the stock price for Firm X is closest to ________.

A) $6.00

B) $8.00

C) $24.00

D) $12.00

Reference no: EM131346631

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