shares currently selling at $2 per share. Debt is trading at 80% of book value with a yield to maturity of 6% and beta of 0.125. The company's cost of equity is 12% and the corresponding beta is 1.25. The company is subject to a tax rate of 30%. 1) What is the beta of the firm's assets (that is, the beta of the equity if the company had zero debt)? 2) The new CFO at Long-Termers Pty Ltd decides to take advantage of low interest rates issuing new debt amounting to a market value of $40,000 at the same yield as previously. Assuming the beta of debt remains the same, what would be the beta of equity now? 3) If the risk-free interest rate is 1% and the expected return on the S&P500 market index is 10%, what is Long-Termers Pty Ltd's cost of equity after the changes promoted by the new CFO? 4) Under Long-Termer Pty Ltd's new capital structure, should the company invest $8 million in a project (with the same business risk and debt capacity) that generates a perpetual after-tax cash flow of $1,000,000? Explain your answer. Question 6 The capital structure of Long-Termers Pty Ltd consists of $100,000 debt (book value) and 10,000 shares currently selling at $2 per share. Debt is trading at 80% of book value with a yield to maturity of 6% and beta of 0.125. The company's cost of equity is 12% and the corresponding beta is 1.25. The company is subject to a tax rate of 30%. 1) What is the beta of the firm's assets (that is, the beta of the equity if the company had zero debt)? 2) The new CFO at Long-Termers Pty Ltd decides to take advantage of low interest rates issuing new debt amounting to a market value of $40,000 at the same yield as previously. Assuming the beta of debt remains the same, what would be the beta of equity now? 3) If the risk-free interest rate is 1% and the expected return on the S&P500 market index is 10%, what is Long-Termers Pty Ltd's cost of equity after the changes promoted by the new CFO? A 4) Under Long-Termer Pty Ltd's new capital structure, should the company invest $8 million in a project (with the same business risk and debt capacity) that generates a perpetual after-tax cash flow of $1,000,000? Explain your answer. 26 32 shares currently selling at $2 per share. Debt is trading at 80% of book value with a yield to maturity of 6% and beta of 0.125. The company's cost of equity is 12% and the corresponding beta is 1.25. The company is subject to a tax rate of 30%. 1) What is the beta of the firm's assets (that is, the beta of the equity if the company had zero debt)? 2) The new CFO at Long-Termers Pty Ltd decides to take advantage of low interest rates issuing new debt amounting to a market value of $40,000 at the same yield as previously. Assuming the beta of debt remains the same, what would be the beta of equity now? 3) If the risk-free interest rate is 1% and the expected return on the S&P500 market index is 10%, what is Long-Termers Pty Ltd's cost of equity after the changes promoted by the new CFO? 4) Under Long-Termer Pty Ltd's new capital structure, should the company invest $8 million in a project (with the same business risk and debt capacity) that generates a perpetual after-tax cash flow of $1,000,000? Explain your answer. Question 6 The capital structure of Long-Termers Pty Ltd consists of $100,000 debt (book value) and 10,000 shares currently selling at $2 per share. Debt is trading at 80% of book value with a yield to maturity of 6% and beta of 0.125. The company's cost of equity is 12% and the corresponding beta is 1.25. The company is subject to a tax rate of 30%. 1) What is the beta of the firm's assets (that is, the beta of the equity if the company had zero debt)? 2) The new CFO at Long-Termers Pty Ltd decides to take advantage of low interest rates issuing new debt amounting to a market value of $40,000 at the same yield as previously. Assuming the beta of debt remains the same, what would be the beta of equity now? 3) If the risk-free interest rate is 1% and the expected return on the S&P500 market index is 10%, what is Long-Termers Pty Ltd's cost of equity after the changes promoted by the new CFO? A 4) Under Long-Termer Pty Ltd's new capital structure, should the company invest $8 million in a project (with the same business risk and debt capacity) that generates a perpetual after-tax cash flow of $1,000,000? Explain your answer. 26 32
