Question 5 (1 mark al Bradd Enterprises is currently an all-equity financed him with an expected return of 12 it is considering borowing money to buy back some of testing thinaing it leverage. Asume a perfect capital market Spovadtorm to the point that is de equity to 0.25. With this amount of it, the cost of detit. What will the expected tumatuty beat ) Suppose that instead, add borrow to the point outis debeauty 13. Wismount of debt, vart will be much. As a result, the cost of what we expected return of equity be in this can mark wa Dicunt you wes in and with reference to Modiglau and Miller's Proposition (MMD) Particularly in your answer to the top of the involved. Omarie How can the use of debt financing better align the incentives of managers with the interests of shareholder manis Melon Industries has no debt and expects to generate free cash flows of 20 milion each year, Milton believes that if it permanently increases its develotto 45 min risk of financial distress may cause it to lose some customers and receive less favourable terme from its suppliers. As a result, Milton's expected free how with debt wiedesto mo pery Suppose Milton's tax rates 30%, the milk tice rates the expected return of the marila 7% and the beta of Mto's tech town 12 with or without everage Estimate Milton's without everage. (2 market Estimate Millons value with the new leverage. (2 mars a Bradd Enterprises is currently an all-equity financed firm with an expected return of 12%. It is considering borrowing money to buy back some of its eating shares, thus increasing leverage. Assume a perfect capital market. Suppose Badd borrows to the point that its debt city ratio 02 With this amount of debt, the cost of debt is what will the expected return of equity be after this transaction (t man il) Suppose that instead, Bradd bortoves to the point dat is de equity post with this amount of debt, Brades detit will be much risker. As a result, the cost of debt will be x What we expected return of equity be in this case? (1 mars od Discuss your answers in and to with reference to Modi and Millers Proposition 2MMParticularly link your answer to the type of risks involvd. marks) How can the use of debt financing better align the incentives of managers with the interests of shareholders? (2 marka Milton Industries has no debt and expects to generate tree cash flows of 20 milion each year Miton believes that fit permanently increases its level of debt to 45 mio the risk of financi distress may cause it to lose some customers and receive less favourable terms from its suppliers. As a result, Moton's expected tree cash flows with debt wil decrease to 16 million per year Suppose Milton's tax rate is 30%, the risk tree rate is 12 the expected return of the market and the beta of Milton's free cash flow is 1.2 with or without leverage 0 Estimate Milton's value without leverage. (2 marks) Estimate Milton's value with the new leverage (2 marks) Question 5 (1 mark al Bradd Enterprises is currently an all-equity financed him with an expected return of 12 it is considering borowing money to buy back some of testing thinaing it leverage. Asume a perfect capital market Spovadtorm to the point that is de equity to 0.25. With this amount of it, the cost of detit. What will the expected tumatuty beat ) Suppose that instead, add borrow to the point outis debeauty 13. Wismount of debt, vart will be much. As a result, the cost of what we expected return of equity be in this can mark wa Dicunt you wes in and with reference to Modiglau and Miller's Proposition (MMD) Particularly in your answer to the top of the involved. Omarie How can the use of debt financing better align the incentives of managers with the interests of shareholder manis Melon Industries has no debt and expects to generate free cash flows of 20 milion each year, Milton believes that if it permanently increases its develotto 45 min risk of financial distress may cause it to lose some customers and receive less favourable terme from its suppliers. As a result, Milton's expected free how with debt wiedesto mo pery Suppose Milton's tax rates 30%, the milk tice rates the expected return of the marila 7% and the beta of Mto's tech town 12 with or without everage Estimate Milton's without everage. (2 market Estimate Millons value with the new leverage. (2 mars a Bradd Enterprises is currently an all-equity financed firm with an expected return of 12%. It is considering borrowing money to buy back some of its eating shares, thus increasing leverage. Assume a perfect capital market. Suppose Badd borrows to the point that its debt city ratio 02 With this amount of debt, the cost of debt is what will the expected return of equity be after this transaction (t man il) Suppose that instead, Bradd bortoves to the point dat is de equity post with this amount of debt, Brades detit will be much risker. As a result, the cost of debt will be x What we expected return of equity be in this case? (1 mars od Discuss your answers in and to with reference to Modi and Millers Proposition 2MMParticularly link your answer to the type of risks involvd. marks) How can the use of debt financing better align the incentives of managers with the interests of shareholders? (2 marka Milton Industries has no debt and expects to generate tree cash flows of 20 milion each year Miton believes that fit permanently increases its level of debt to 45 mio the risk of financi distress may cause it to lose some customers and receive less favourable terms from its suppliers. As a result, Moton's expected tree cash flows with debt wil decrease to 16 million per year Suppose Milton's tax rate is 30%, the risk tree rate is 12 the expected return of the market and the beta of Milton's free cash flow is 1.2 with or without leverage 0 Estimate Milton's value without leverage. (2 marks) Estimate Milton's value with the new leverage (2 marks)
