Dewey, Cheatem, and Howe, a leading publisher of finance textbooks, currently has the following capital structure. market
Question:
Dewey, Cheatem, and Howe, a leading publisher of finance textbooks, currently has the following capital structure.
market value ofdebt=375,000
face value ofdebt=500,000
market value ofequity=625,000
beta ofdebt=0
beta ofequity=1.6
Suppose the firm is considering a new edition of its Principles of Corporate Finance textbook. The following are expected marginal cash flows:
PeriodExpected cash flows
0100,000
1+100,000
2+200,000
Assume that the firm can borrow 100,000 to finance the project at competitive terms, which involves promising to repay 120,000 in year two, with no intermediate interest payments. Assume no taxes.
Other information:
expected market return = 13%/year
riskless rate of interest =3%/year
correlation between new project cash flows and company's other projects = 1
(A)What is the firm's cost of capital before the project? After the project? (3 pts)
(B)What is the market value before the project is taken?After? (5 pts)