Assume capital markets are perfect (i.e. the Modigliani- Miller Theorems hold). The Cat Nap Pet Stores capital structure is currently comprised of 13 million dollars of debt and 16 million dollars of equity. If the firm issues 2 million dollars in new debt, what will the value of the company's equity be after the issuance of the new debt?

Hardmon Enterprises is currently an all-equity firm with an expected return of 18%. It is considering a leveraged recapitalization in which it would borrow and repurchase existing shares. (Assume perfect capital markets.) a. Suppose Hardmon borrows to the point that its debt-equity ratio is 0.50. With this amount of debt, the debt cost of capital is 5%. What will the expected return of equity be after this transaction? b. Suppose instead Hardmon borrows to the point that its debt-equity ratio is 1.50. With this amount of debt, Hardmon's debt will be much riskier. As a result, the debt cost of capital will be 7%. What will the expected return of equity be in this case? c. A senior manager argues that it is in the best interest of the shareholders to choose the capital structure that leads to the highest expected return for the stock. How would you respond to this argument? a. Suppose Hardmon borrows to the point that its debt-equity ratio is 0.50. With this amount of debt, the debt cost…

A company needs ghc1000 to finance its activities. The firm can finance this expenditure either by bonds or equity. Interest rate on bonds is 10%. The company can earn ghe 160 in good years and ghc80 in bad years. Assuming the firm faces one-quarter probability of good years; What will be the stream of returns on both bonds and equity if the company chooses the following financing options? i. a. 100% equity financing ii. 50% equity financing iii. 20% equity financing iv. 0% equity financing Estimate the equity risk associated with each option in (a) As an investor who wants to purchase a share in the company, which financing option will make you purchase the stock. Why? b. C.

The FMS Corporation needs to raise investment money amounting to $40 million in new equity. The firm’s market risk is βM = 1.4, which means the firm is believed to be riskier than the market average. The risk free interest rate is 2.8% and the average market return is 9% per year. What is the cost of equity for the $40 million?

Hardmon Enterprises is currently an​ all-equity firm with an expected return of 18.3%. It is considering a leveraged recapitalization in which it would borrow and repurchase existing shares. Assume perfect capital markets. a. Suppose Hardmon borrows to the point that its​ debt-equity ratio is 0.50. With this amount of​ debt, the debt cost of capital is 5%. What will be the expected return of equity after this​ transaction? b. Suppose instead Hardmon borrows to the point that its​ debt-equity ratio is 1.50. With this amount of​ debt, Hardmon's debt will be much riskier. As a​ result, the debt cost of capital will be 7%. What will be the expected return of equity in this​ case? c. A senior manager argues that it is in the best interest of the shareholders to choose the capital structure that leads to the highest expected return for the stock. How would you respond to this​ argument?

Handmon Enterprises is currently an all-equity firm with an expected return of 10.4%, it is considering borrowing money to buy back some of its existing shores Assume perfect capital markets. Suppose Hardmon borrows to the point that its debt-equity ratio is 0.50. With this amount of debt, the debt cost of capital is 4%. What will be the expected return of equity after this transaction b. Suppose instead Hardmon borrows to the point that its debl-equity ratio is 1.50. With this amount of debt, Handmon's debt will be much riskier. As a result, the debt cost of capital will be 6%. What will be the expected retum of equity in this case? A senior manager argues that it is in the best interest of the shareholders to choose the capital structure that leads to the highest expected return for the stock. How would you respond to this a Suppose Harmon bonows to the point that its debt-equity radio is 0.50 With this amount of debt, the debt cost of capital is 4%. What will be the expected retum…

Milton Industries expects free cash flows of $19 million each year. Milton's corporate tax rate is 22 %, and its unlevered cost of capital is 13%. Milton also has outstanding debt of $73.37 million, and expects to maintain this level of debt permanently. a. What is the value of Miton Industries without leverage? b. What is the value of Milton Industries with leverage? Cam a. What is the value of Milton Industries without leverage? The value of Milton Industries without leverage is 5 million (Round to two decimal places.) b. What is the value of Milton Industries with leverage? The value of Milton Industries with leverage is $million. (Round to two decimal places)

Wolfrum Technology (WT) has no debt. Its assets will be worth $467 million one year from now if the economy is strong, but only $295 million in one year if the economy is weak. Both events are equally likely. The market value today of its assets is $291 million. a. What is the expected return of WT stock without leverage? b. Suppose the risk-free interest rate is 5%. If WT borrows $139 million today at this rate and uses the proceeds to pay an immediate cash dividend, what will be the market value of its equity just after the dividend is paid, according to MM? c. What is the expected return of WT stock after the dividend is paid in part (b)? a. The unievered expected return of WT stock is (Round to two decimal places)

Suppose an investment bank is buying $50 million in long-term mortgage-backed securities and finances the investment by borrowing 70% and paying for the other 30% out of equity. What is the bank's leverage ratio? a) 0.30 b) 0.13 c) 3/7 d) 3

A company needed ghc 1000 to finance its activities. The firm can financed this expenditure either by bonds or equity. Interest rate on bonds is 10%. The company can earn ghc 160 in good years and ghc80 in bad years. Assuming the firm faces equal probability of good and bad years; i What will be the stream of returns on both bonds and equity if the company chooses the following financing options a 100% equity financing b 50% equity financing c 20% equity financing d 0% equity financing ii Estimate the equity risk associated with each option in (i) iii As an investor who wants to purchase a share in the company, which financing option will make you purchase the stock. Why????