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In M&M - Land there are no corporate income taxes, bankruptcy costs, or agency costs. The market value of Miller - Mart Corp s assets

In M&M-Land there are no corporate income taxes, bankruptcy costs, or agency costs. The market
value of Miller-Mart Corps assets is $40 million. Miller-Mart has 15,000 bonds outstanding. The
bonds are trading at par and their coupon rate is 6%(each bond has a $1,000 face value and
coupons are paid annually). Miller-Marts (levered) equity cost of capital is rE =8%. Government
risk free bills pay 3% interest and the market risk premium in M&M-Land equals 5%.
a. What is the beta of Miller-Mart stock? (Hint: use the CAPM.)
b. What is Miller-Marts weighted average cost of capital (rWACC)?
c. What would Miller-Marts weighted average cost of capital (rWACC) be if the firm were 100%
equity financed?
d. Suppose Miller-Mart sells 5,0006% annual coupon bonds, increasing the number of Miller-
Mart bonds outstanding to 20,000, and uses the proceeds to repurchase shares. The new bonds
are sold at par. Calculate Miller-Marts equity cost of capital (rE) after the refinancing.
e. What is the beta of Miller-Mart stock after the refinancing? Comment on whether and why it
is higher or lower than the beta calculated in part (a).

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