Reference no: EM133495985

Question

1. Company A has no debt in its capital structure. Company B has a large amount of debt in its capital structure.

All else equal, which company would have the higher cost of equity?

2. Teesla Corp. is a fast-growing tech company. The company just paid its first dividend of $1.50 per share. Given its rapid growth it expects to have the following annual dividend increases:

Years 1 and 2 20%

Thereafter a constant rate of 5%

Investors believe the company to be risky and require a rate of return of 17% on its stock. What is the company's current share price?

3. MM Corp. currently has a required return on its assets/unlevered WACC of 12.0%. It plans to borrow $3,000,000 at an interest rate of 6.0%. It has EBIT of $2,000,000 and a tax rate of 25.0%. Using the MM Proposition with taxes what is the value of the company (enterprise value not equity value) after it borrows the $3,000,000?

$15,542,000

$13,250,000

$13,000,000

$12,500,000

4. B/E Corp.'s management has decided to repurchase some of the company's shares. The company has 1,500,000 shares outstanding that trade at $25.00 per share and book value equity of $37,500,000. It plans to repurchase 800,000 shares at $25.00 and will use debt to finance the purchase at an interest rate of 7.0%. The company's EBIT is $4,000,000. Ignoring income taxes, what is the breakeven EBIT (the EBIT level where pre and post repurchase EPS and ROE are the same)?