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Assume that capital markets are perfect except for the presence of taxes. Firm B has a market value of equity of $150 million and a market value of debt of $30 million. It is expected to keep its leverage ratio (D/(D+E)) constant. Its pre-tax cost of debt is 5%. Its marginal corporate tax rate is 20%. Firm B's first cash flow arrives next year and its expected free cash flow next year is $12 million. Its expected permanent growth rate of free cash flow is 2%.
(a) What is Firm B's WACC?
(b) What is the value of Firm B's interest tax shield?
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The purpose of this assignment is to demonstrate to students how the issuance of debt to purchase outstanding common stock could affect the value of the company's equity and redefine the capital structure. The problem will also allow students to e..
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A Japanese investor holds a portfolio of British stocks worth £10 million. The current threemonth dollar/pound forward exchange rate is £:$ = 1.65, and the current three-month dollar:yen forward exchange rate is $:¥ = 100. What position should the..
The balance sheet show $ 20 million of short-term investment that are unrelated to investment, $30 million of long-term debt, $40 million of preferred stock, and $100 million of common equity. What is the best estimate of the stock's price per shar..
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