Exam 14: Capital Structure in a Perfect Market

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.

Assume that in addition to 1.25 billion common shares outstanding,Luther has stock options given to employees valued at $2 billion.After the repurchase how many shares will Luther have outstanding?

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 weak economy is closest to:

Louie's Truck Repair has assets with a market value of $8000.The company has three types of securities: equity,$2500 of debt,and 100 warrants that are fairly priced at $20 each.What is the value of Louie's equity?

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.Calculate the expected returns for both the levered and unlevered firm.

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:

With perfect capital markets,what is the market value of Luther's equity after the share repurchase?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

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

Equity in a firm with debt is called:

Use the following information to answer the question(s)below. Galt Industries has no debt,total equity capitalization of $600 million,and an equity beta of 1.2.Included in Galt's assets is $90 million in cash and risk-free securities.Assume the risk-free rate is 4% and the market risk premium is 6%. -Galt's asset beta (ie the beta of its operating assets)is closest to:

Suppose that you borrow $30,000 in financing the project.According to MM proposition II,the firm's equity cost of capital will be closest to:

If Rockwood finances their expansion by issuing $100 million in debt at 5%,what will Rockwood's cost of equity capital be?

If Rockwood finances their expansion by issuing new stock,what will Rockwood's cost of equity capital be?

Assume that MM's perfect capital market conditions are met and that you can borrow and lend at the same 5% rate as With.You have $5000 of your own money to invest and you plan on buying Without stock.Using homemade leverage,how much do you need to borrow in your margin account so that the payoff of your margined purchase of Without stock will be the same as a $5000 investment in With stock?

Suppose that you borrow only $45,000 in financing the project.According to MM proposition II,calculate the firm's equity cost of capital.

Assume that MM's perfect capital market conditions are met and that you can borrow and lend at the same 5% rate as With.You have $5000 of your own money to invest and you plan on buying With stock.Using homemade (un)leverage,how much do you need to invest at the risk-free rate so that the payoff of your account will be the same as a $5000 investment in Without stock?

The market value of Luther's non-cash assets is closest to:

Which of the following statements is FALSE?