Question 1

The M&M Theory Company has an unleveraged value of $3,250,000,$1,500,000 in debt,and a corporate tax rate of 34%.In addition,the firm's bankruptcy costs have been estimated at $800,000 and the probability of bankruptcy is 10%,calculate:
A) expected bankruptcy cost
B) Value of the firm

Accepted Answer

The answer of The M&M Theory Company has an unleveraged...

Question 2

Although debt financing is usually the cheapest component of capital,it cannot be used to excess because:

Accepted Answer

A)  interest rates may change. 
B)  the firm's share price will increase and raise the cost of equity financing. 
C)  the financial risk of the firm may increase and thus drive up the cost of all sources of financing. 
D)  underwriting costs may change.

Question 3

For a firm paying 7% for new debt,the higher the firm's tax rate:

Accepted Answer

A)  the higher the after tax cost of debt. 
B)  the lower the after tax cost of debt. 
C)  after tax cost is unchanged. 
D)  Not enough information to judge.

Question 4

Least squares regression analysis makes up the statistical equation for the capital asset pricing model.

Accepted Answer

A) True 
 B)False

Question 5

A firm's stock is selling for $85.The dividend yield is 5%.A 7% growth rate is expected for the common stock.The firm's tax rate is 32%.What is the firm's cost of common equity?

Accepted Answer

A)  8.16% 
B)  12.00% 
C)  12.35% 
D)  10.40%

Exam 11: Cost of Capital

The M&M Theory Company has an unleveraged value of $3,250,000,$1,500,000 in debt,and a corporate tax rate of 34%.In addition,the firm's bankruptcy costs have been estimated at $800,000 and the probability of bankruptcy is 10%,calculate: A) expected bankruptcy cost B) Value of the firm

Although debt financing is usually the cheapest component of capital,it cannot be used to excess because:

For a firm paying 7% for new debt,the higher the firm's tax rate:

Least squares regression analysis makes up the statistical equation for the capital asset pricing model.

A firm's stock is selling for $85.The dividend yield is 5%.A 7% growth rate is expected for the common stock.The firm's tax rate is 32%.What is the firm's cost of common equity?