Exam 14: Capital Structure in a Perfect Market

Suppose that Rearden Metal currently has no debt and has an equity cost of capital of 12%.Rearden is considering borrowing funds at a cost of 6% and using these funds to repurchase existing shares of stock.Assume perfect capital markets.If Rearden borrows until they achieved a debt-to-equity ratio of 50%,then Rearden's levered cost of equity would be closest to:

Use the following information to answer the question(s)below. Galt Industries has 50 million shares outstanding and a market capitalization of $1.25 billion.It also has $750 million in debt outstanding.Galt Industries has decided to delever the firm by issuing new equity and completely repaying all the outstanding debt.Assume perfect capital markets. -The number of shares that Galt must issue is closest to:

Use the information for the question(s)below. Luther Industries has no debt,a total equity capitalization of $20 billion,and a beta of 1.8.Included in Luther's assets are $4 billion in cash and risk-free securities. -What is Luther's enterprise value?

Suppose the risk-free interest rate is 4%.If Nielson borrows $150 million today at this rate and uses the proceeds to pay an immediate cash dividend,then according to MM,the expected return of Nielson's stock just after the dividend is paid would be closest to:

Which of the following is NOT one of Modigliani and Miller's set of conditions referred to as perfect capital markets?

Which of the following statements is FALSE?

Sisyphean Bolder Movers Incorporated has no debt,a total equity capitalization of $50 billion,and a beta of 2.0.Included in Sisyphean's assets are $12 billion in cash and risk-free securities.Calculate Sisyphean's enterprise value and unlevered cost of equity considering the fact that Sisyphean's cash is risk-free.

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Use the information for the question(s)below. Consider two firms: firm Without has no debt,and firm With has debt of $10,000 on which it pays interest of 5% per year.Both companies have identical projects that generate free cash flows of $1000 or $2000 each year.Suppose that there are no taxes,and after paying any interest on debt,both companies use all remaining cash free cash flows to pay dividends each year. -Fill in the table below showing the payments debt and equity holders of each firm will receive given each of the two possible levels of free cash flows:

Suppose that to raise the funds for the initial investment the firm borrows $80,000 at the risk free rate,then the cash flow that equity holders will receive in one year in a strong economy is closest to:

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Suppose that to raise the funds for the initial investment,the project is sold to investors as an all-equity firm.The equity holders will receive the cash flows of the project in one year.The market value of the unlevered equity for this project is closest to:

Which of the following equations would NOT be appropriate to use in a firm with risky debt?

With perfect capital markets,what is the market price per share of Luther's stock after the share repurchase?

Consider the following equation: E + D = U = A The U in this equation represents:

Two separate firms are considering investing in this project.Firm unlevered plans to fund the entire $80,000 investment using equity,while firm levered plans to borrow $45,000 at the risk-free rate and use equity to finance the remainder of the initial investment.Construct a table detailing the percentage returns to the equity holders of both the levered and unlevered firms for both the weak and strong economy.

Following the borrowing of $12 million and subsequent share repurchase,the expected earnings per share for RC is closest to:

What is the conservation of value principle?