What is the cost of equity of the levered firm

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Reference no: EM13937956

1. You purchase a small business that is valued at $164857. You decide to borrow $73579 at 5% interest and pay for the rest with equity. The debt is due in one year, and you expect the firm to have cash flows of $67233 in one year. What is your return on equity?

2. You purchase a small business that is valued at $114915. You decide to borrow $65267 at 8% interest and pay for the rest with equity. The debt is due in one year, and you expect the firm to have cash flows of $78891 in one year. Your firm is risky, so its cost of equity is 4 percentage points above its cost of debt. What is the cost of equity of the levered firm?

3. A firm needs to raise external funds to finance its new project. It needs to raise $15 million in new equity. Its investment bankers will charge 7% of the issue as a fee; in other words, the stock will be underpriced by 7%. How much will the firm need to issue in order to net $15 million? (In other words, how much must the amount issued be so that when 7% is taken out as a transaction cost, the firm will be left with $15 million to use on its new project?)

Reference no: EM13937956

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