Question
a) SPRITE 2021 a zero growth firm because of covid-19 development, has an expected EBIT of GHS 100,000 and a corporate tax rate of 30%.
a) SPRITE 2021 a zero growth firm because of covid-19 development, has an expected EBIT of GHS 100,000 and a corporate tax rate of 30%. The firm uses GHS 500,000 of 12.0% debt, and the cost of equity to an unlevered firm in the same risk class is 16.0%. What is the value of the firm according to Modigliani-Miller (MM) theorem with corporate taxes?
b) The required return on the assets of your COLA firm is 30%. Its cost of debt is 25%, and the debt-to-assetsratio is 45%.
i. What is COLA firms cost of equity?
ii. What would 60% cost of equity imply about debt-to-equity ratio of a competitor which is similar to you in all other respects?
iii. Based on this information, what is the proportion of equity in your competitor?
iv. What is the proportion of equity in your firm?
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