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Please assist on task B and C. PROBLEM 5: Modigliani & Miller - cost of risky debt (30 Points) Consider a firm that operates in
Please assist on task B and C.
PROBLEM 5: Modigliani \& Miller - cost of risky debt (30 Points) Consider a firm that operates in a perfect capital market. At date 1 the firm generates either a cash flow of 1700 or a cash flow of 500 . The cash flow depends on whether the economy is in a good state or a bad state. Both scenarios are equally likely. Assume further that the unlevered cost of capital of the firm is 10% and the risk-free rate is equal to 3%. A) How much risk-less debt can the project support at date 0 ? B) Compute the cost of debt for the following initial capital structure: At date 0 , the value of equity is equal to E0=500 and the value of debt is equal to D0=500. What is the corresponding cost of equity? What is the firm's WACC? C) Compute the cost of debt for the following initial capital structure: At date 0 , the value of equity is equal to E0=200 and the value of debt is equal to D0=800. What is the corresponding cost of equity? What is the firm's WACC? PROBLEM 5: Modigliani \& Miller - cost of risky debt (30 Points) Consider a firm that operates in a perfect capital market. At date 1 the firm generates either a cash flow of 1700 or a cash flow of 500 . The cash flow depends on whether the economy is in a good state or a bad state. Both scenarios are equally likely. Assume further that the unlevered cost of capital of the firm is 10% and the risk-free rate is equal to 3%. A) How much risk-less debt can the project support at date 0 ? B) Compute the cost of debt for the following initial capital structure: At date 0 , the value of equity is equal to E0=500 and the value of debt is equal to D0=500. What is the corresponding cost of equity? What is the firm's WACC? C) Compute the cost of debt for the following initial capital structure: At date 0 , the value of equity is equal to E0=200 and the value of debt is equal to D0=800. What is the corresponding cost of equity? What is the firm's WACCStep by Step Solution
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