Figure 11.1: Selected information for Silicon Solutions Inc.

\begin{array}{|l|l|l} \hline& \text { ALL EQUITY } & \text { EQUTTY AND DEBT } \\ \hline & & \\\hline \text { Number of shares } & 1,000,000 & 750,000 \\\hline \text { Price per share } & \$ 10 & \$ 10 \\\hline \text { Market value of shares } & \$ 10,000,000 & \$ 7,500,000 \\\hline \text { Market value of debt } & - & \$ 2,500,000 \\\hline & & \\\hline \text { Anticipated operating income } & \$ 1,000,000 & \$ 1,000,000 \\\hline \text { Interest } & - & \$ 150,000 \\\hline \text { Earnings (after interest) } & \$ 1,000,000 & \$ 850,000 \\\hline \text { Earnings per share } & \$ 1.00 & \$ 1.13 \\\hline \text { Return on shares } & & \\\text { Average cost of capital } & & \\\text { Return on debt } & & \\\hline\end{array}

-According to Modigliani and Miller (M&M),in a world of perfect capital markets,what will be the expected equity return (or cost of equity)for a firm that has a cost of capital of 14 percent,a cost of debt of 8 percent,debt valued at $3.0 million,and equity valued at $4.0 million? What would happen to the cost of equity as the amount of debt increased? What would happen to the cost of debt if the amount of debt was increased?

Assume an M&M World with Taxes Where the Corporate Tax

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