QUESTION 13 2 Company XYZ generates annual cash-flows equal to USD 1 million, in a perpetual way. For simplicity, we assume that the firm cost of equity and cost of debt are both equal to 10 percent, and the firm has a (perpetual) debt level equal to USD 1 million. Company XYZ is incorporated in a country that currently has a corporate tax of 0 percent. It follows that the market value of the assets of Company XYZ is USD 10 million. Suppose that the country announces unexpectedly that the marginal corporate tax rate is now equal to 10 percent. What is the change in the total market value of the assets of Company XYZ associated to the announcement? O Decrease by USD 1 million O Decrease by USD 0.9 million O Decrease by USD 0.2 million O Increase by USD 0.2 million O Increase by USD 0.8 million 2 QUESTION 14 AAA Company is financed entirely by common stock that is priced to offer a 15 percent expected return. If the company repurchases 25 percent of the common stock and substitutes an equal value of debt yielding Opercent, what is the expected return on the common stock after refinancing? O 15 percent O 21 percent 18 percent 33 percent O 10 percent Which statements about the Modigliani Miller Theorem II are correct? Equity beta equals asset beta if the firm has no debt Equity is less risky than debt Equity returns increase in the debt-to-equity ratio The cost of debt does not matter for the cost of equity Asset beta increases in the debt-to-equity ratio QUESTION 16 According to trade-off theory, which of the five possibilities maximizes firm value? O PV(TS) = 100 PV(BC) = 50 O PV(TS) = 100 PV(BC) = 90 PV(TS) = 60 PV(BC) = 50 PV(TS) = 50 PV(BC) = 30 OPV(TS) = 20 PV(BC) = 10