What is the firm cost of equity

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Reference no: EM132028540

1. A firm has a debt-equity ratio of 1.0. The required return on the firm’s assets is 11.1% and the pre-tax cost of debt is 4.1%. Ignore taxes. What is the firm’s cost of equity?

a) 15.3%

b) 18.1%

c) 23.1%

d) 21.7

2. A company is an all-equity firm that has projected earnings before interest and taxes (EBIT) of $500,000 forever. The current cost of equity rs = 10% and the tax rate T = 20%. The company is in the process of issuing $1.5 million of bonds at par that carry a 6% annual coupon. What is the unlevered value of the firm (in millions)? (Note: You should use MM capital structure model with corporate taxes, but without personal taxes and bankruptcy costs. The formula for the value of unlevered firm: VU = EBIT x (1-T) / rs).

a) $4.00 million

b) $2.23 million

c) $2.86 million

d) $3.50 million

3. According to the information from Question 9, what is the levered value of the firm (in millions)? (Note: The value of levered firm VL = VU + Present value of annual interest tax shield) _______

a) $4.30 million

b) $4.70 million

c) $3.22 million

d) $5.20 million

Reference no: EM132028540

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