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Suppose there are two firms operating in the same industry. The two firms are almost identical. The only difference is their capital structure. Firm UU has only equity while firm LL has 30% of debt and 70 percent of equity.
Further suppose that both companies have the same expected net operating income of $1,000. We make a further assumption that this stream of income will last forever. The required rate of return for both companies is 5 percent.
a) According to the Modigliani-Miller model, what is the value of firm UU and firm LL? Explain your answer.
b) Assume that the capital structure of company UU changes. The new capital structure is such that company UU has 20% of debt and 80% of equity. Does your result in a) change? Explain your answer.c) Under which circumstances, in your opinion, might the Modigliani-Miller model work?d) Suppose you have just been appointed financial manager of company UU. You need to decide what the optimal capital structure is.What would you do?
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Suppose you received a $10,000 bonus which you would like to invest for your child's education. Compute the value of the bonus in 10-years if invested in each of the following:
Objective type questions based on cost of capital and portfolio management and what is the expected price of the stock seven years from now
DeSoto Tools, Corporation is considering to expand production. The expansion will cost $300,000, which can be financed either by bonds at an interest rate of 14% or through selling 10,000 shares of common stock at $30 per share.
Dyl Pickle Corporation had credit sales of $3,500,000 last year and its days sales outstanding was DSO = 35 days. Determine its average receivables balance, based on a 365-day year?
A Corporation is unlevered, zero growth firm with expected EBIT of $4 million and corporate tax rate of 40% Find out the optimal debt level according to MM with corporate taxes (with no financial distress)?
Use the Library to go to the SBA US Government, Small Business Administration web site. There is a vast amount of information available on this site.
Describe the relationship between type of reward structure employed by an organization for its employees and employee effectiveness and work productivity.
Ratio measures the proportion of total assets financed by the firm's creditors - measure of a company's performance and condition.
How large fund will you need when you retire in 20 years to give the 30-year, $20,000 retirement annuity? What effect would increase in the rate you can earn both throughout and prior to retirement have on the values found in parts a and b? Discuss..
All the following employees are considered highly compensated employees in the following year EXCEPT
After analyzing a sample of remaining 480 items, you determine that sample is overpriced by 6%. By using this 6% decrement factor, what cost must you evaluate for those items?
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