Question
Can someone help with this? Consider a firm ABC that will produce free cash flows 1 year from today, and no subsequent cash flows. The
Can someone help with this?
Consider a firm ABC that will produce free cash flows 1 year from today, and no subsequent cash flows. The free cash flows one year from today will be $90K if economy is weak and $117K if economy is strong and each outcome is equally likely. THe firm is currently financed with 100% equity with beta of 1. Suppose firm is considering issuing $90K in debt and using the proceeds to repurchase equity. Risk free rate is 5% and market risk premium is 4%. Assume that Modigliani-Miller assumptions hold and that the CAPM is true
a) what is expected return on debt b) what is market value of firm's expected FCF before debt issuance c) market value of equity before debt issuance d) market value of equity after debt issuance e) beta of equity after debt issuance f) discount rate on equity after debt issuance g) what is WACC of firm after debt issuance using expected returns on equity and debt
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