Question
1. The firm has EBIT of $25,500 and the tax rate of 21%. The unlevered cost of capital, Ru, is 12.7%. The firm also has
1. The firm has EBIT of $25,500 and the tax rate of 21%. The unlevered cost of capital, Ru, is 12.7%. The firm also has $10,000 of debt that carries an annual coupon of 5%. The debt is quoted at 105. What is the value of a levered company? O a.$168,622.05 O b. $158,622.05 O c. $169,122.05 O d. $159,122.05 O e. None of the choices
2. The firm's debt-to-equity ratio is 0.75. If the cost of the firm's stock is 12% and the cost of the firm's debt is 9%, what is the WACC? Assume the tax rate is 21%.
O a. 990% O b. 10.78% O c. 8.67% O d. 11.29% O e. None of the above
3. The required rate of return on a bond, used in the WACC calculation, is best estimated by calculating the yield to maturity on the firm's existing long-term and short-term debt. Select one: O True O False
4. According to the CAPM, the required rate of return on a stock should equal at least what is offered by a Treasury security plus a compensation for risk, which is measured by the stock's sensitivity to market fluctuations. Select one.
O a. True
O b. False
5. According to Modigliani and Miller Proposition I without taxes, optimal capital structure exists and it is 100% equity. Select one: O True O False
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