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ABC Corporation and XYZ Corporation are identical firms in all aspects except for their capital structure. ABC is financed by 100% equity. XYZ is financed by 80% equity and 20% debt. ABC's current cost of equity is 12%. XYZ's current cost of debt is 8%. The corporate tax rate is 30%.
What are XYZ's (i) cost of equity (3 pt); (ii) WACC? (3 pt)
(iii) Discuss why XYZ’s cost of equity is higher than that of ABC. (2 pt)
(iv) What’s ABC’s WACC? (2 pt)
(v) Discuss why XYZ’s WACC is less than that of ABC despite a higher cost of equity. (2 pt)
If the firm's market capitalization rate is 15%, what is the present value of its growth opportunities?
To finance the purchase, GBH will sell 20-year bonds with a $1000 par value paying 7.9 percent per year (paid semi annually) at the market price of $928. Preferred stock paying a $2.55 dividend can be sold for $34.76. Common stock for GBH is currentl..
Amcor limited has a corporate bond outstanding with a 7% coupon semi annual interest 15 years to maturity and face value of $1000.similar bond currently yield 13% but prior agreement company will skip the coupon payments in years 6,7 and 8 (6 payment..
How much new long-term debt financing will be needed in 2017?
Professor’s Annuity Corp. offers a lifetime annuity to retiring professors. For a payment of $70,000 ("present value") at age 65, the firm will pay the retiring professor $500 a month until death. If the professor’s remaining life expectancy is 20 ..
A one-year long forward contract on a non-dividend-paying stock is entered into when the stock price is $40 $38 and the risk-free rate of interest is; 8% per annum with continuous compounding. What are the forward price and the initial value of the f..
Discuss the forward market for foreign exchange. Include forward rates, cross-exchange rates, the forward premium,
A manufacturing company is considering a capacity expansion investment at the cost of $250072 with no salvage value.
Which of the following identifies a key difference between the direct method and the indirect method of the statement of cash flows?
You bought 1,000 shares of Costco (COST) on margin at $60 per share. Your initial margin was 75% and your maintenance margin is 50%. You borrowed at the 9 percent call money rate. You sell Costco (COST) 4 months later for $63. Calculate the dollar am..
Miller and Modigliani created the premise for future work on capital structure, precisely the effect of debt on firm value. How is this work related the stress testing mandated for the Systemically Important Financial Institutions (SIFIs)?
Give your opinion to invest or not in a firm depending on the stock market index value and how your decision will affect the value of the firm
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