Question #24964

1. Firm L has debt with a market value of $200,000 and a yield of 9%. The firm's equity has a

market value of $300,000, its earnings are growing at a rate of 5%, and its tax rate is 40%. A

similar firm with no debt has a cost of equity of 12%. Under the MM extension with growth, what

is Firm L's cost of equity?

a. 11.4%

b. 12.0%

c. 12.6%

d. 13.3%

e. 14.0%

2. Your firm has debt worth $200,000, with a yield of 9%, and equity worth $300,000. It is growing

at a 5% rate, and its tax rate is 40%. A similar firm with no debt has a cost of equity of 12%.

Under the MM extension with growth, what is the value of your firmâ€™s tax shield, i.e., how much

value does the use of debt add?

a. $92,571

b. $102,857

c. $113,143

d. $124,457

e. $136,903

3. Your firm has debt worth $200,000, with a yield of 9%, and equity worth $300,000. It is growing at a

5% rate, and its tax rate is 40%. A similar firm with no debt has a cost of equity of 12%. What is

the value of the firm according to MM with corporate taxes?

a. $475,875

b. $528,750

c. $587,500

d. $646,250

e. $710,875

4. Gomez computer systems has an EBIT of $200,000, a growth rate of 6%, and its tax rate is 40%.

In order to support growth, Gomez must reinvest 20% of its EBIT in net operating assets. Gomez

has $300,000 in 8% debt outstanding, and a similar company with no debt has a cost of equity of

11%.

According to the MM extension with growth, what is the value of Gomezâ€™s tax shield?

a. $156,385

b. $164,616

c. $173,280

d. $182,400

e. $192,000

5. Trumbull, Inc., has total value (debt plus equity) of $500 million and $200 million face value of 1-

year zero coupon debt. The volatility ( ) of Trumbullâ€™s total value is 0.60, and the risk-free rate is

5%. Assume that N(d1) = 0.9720 and N(d2) = 0.9050.

What is the value (in millions) of Trumbullâ€™s equity if it is viewed as an option?

a. $228.77

b. $254.19

c. $282.43

d. $313.81

e. $345.19

market value of $300,000, its earnings are growing at a rate of 5%, and its tax rate is 40%. A

similar firm with no debt has a cost of equity of 12%. Under the MM extension with growth, what

is Firm L's cost of equity?

a. 11.4%

b. 12.0%

c. 12.6%

d. 13.3%

e. 14.0%

2. Your firm has debt worth $200,000, with a yield of 9%, and equity worth $300,000. It is growing

at a 5% rate, and its tax rate is 40%. A similar firm with no debt has a cost of equity of 12%.

Under the MM extension with growth, what is the value of your firmâ€™s tax shield, i.e., how much

value does the use of debt add?

a. $92,571

b. $102,857

c. $113,143

d. $124,457

e. $136,903

3. Your firm has debt worth $200,000, with a yield of 9%, and equity worth $300,000. It is growing at a

5% rate, and its tax rate is 40%. A similar firm with no debt has a cost of equity of 12%. What is

the value of the firm according to MM with corporate taxes?

a. $475,875

b. $528,750

c. $587,500

d. $646,250

e. $710,875

4. Gomez computer systems has an EBIT of $200,000, a growth rate of 6%, and its tax rate is 40%.

In order to support growth, Gomez must reinvest 20% of its EBIT in net operating assets. Gomez

has $300,000 in 8% debt outstanding, and a similar company with no debt has a cost of equity of

11%.

According to the MM extension with growth, what is the value of Gomezâ€™s tax shield?

a. $156,385

b. $164,616

c. $173,280

d. $182,400

e. $192,000

5. Trumbull, Inc., has total value (debt plus equity) of $500 million and $200 million face value of 1-

year zero coupon debt. The volatility ( ) of Trumbullâ€™s total value is 0.60, and the risk-free rate is

5%. Assume that N(d1) = 0.9720 and N(d2) = 0.9050.

What is the value (in millions) of Trumbullâ€™s equity if it is viewed as an option?

a. $228.77

b. $254.19

c. $282.43

d. $313.81

e. $345.19

Expert's answer

Unfortunately, your question requires a lot of work and cannot be done for free.

Submit it with all requirements as an assignment to our control panel and we'll assist you.

Submit it with all requirements as an assignment to our control panel and we'll assist you.

Learn more about our help with Assignments: Finance

## Comments

## Leave a comment