Assume an M & M world with corporate income tax rate Tc = 40%. Risk free rate is 6% and the expected market return is 16%. XYZ Corp. is currently all-equity financed and has a value of $10,000,000. The expected return on XYZ equity is 20%.

 

a,The value of XYZ's bequity is?

 

 

b,XYZ changes its capital structure such that its debt-to-equity ratio is now 0.6. The return on XYZ'sdebt is 7.5%, what is the required rate of return on XYZ will be now? What is the beta of XYZ now? What is the weighted average cost of equity? What is the beta of debt?

 

c,Calculate the total value of XYZ if its capital structure contains$4,000,000 in debt.

 

What is the value of equity now?