QUESTION 55

1. For the next 4 questions suppose the following holds:

   The risk-free rate is 6%, the market risk premium (=E(RM) - RF) is 8%. Assume CAPM holds. A firm has a debt-to-equity ratio of 0.4. The firm's before-tax cost of debt is 10%. The firm's tax rate is 30%. If it had no debt, its cost of equity would be 16%.

   What is the beta of the firm's debt?

   	A	0.25
   	B	0.40
   	C	0.45
   	D	0.5
   	E	0.55

1 points

QUESTION 56

1. What is the beta of the firm's equity if the firm had no debt?

   	A	1.10
   	B	1.15
   	C	1.20
   	D	1.25
   	E	1.30

1 points

QUESTION 57

1. What is the beta of the firm's equity when the debt-to-equity ratio is 0.4?

   	A	1.16
   	B	1.28
   	C	1.32
   	D	1.46
   	E	1.53

1 points

QUESTION 58

1. What is the cost of the firm's equity when the debt-to-equity ratio is 0.4?

   	A	15.28%
   	B	16.24%
   	C	16.60%
   	D	17.68%
   	E	18.24%

1 points

QUESTION 59

1. For the next 4 questions suppose the following holds:

   Consider ABC Co. with the following balance sheets. The firm decides to borrow $500 mil more on a permanent basis, and use the proceeds to repurchase shares. Assume T_C=30%, and that the stock price before the change is $70 per share.

   B/S (BV)			B/S (MV)
   NWC 400	L-T Debt 200		NWC 400	L-T Debt 200
   FA 600	Equity 800		FA 1200	Equity 1400
   1000	1000		1600	1600

   What is the present value of all the tax savings in the future? Assume the firm's debt ($500 m) is permanent and the tax rate also stays the same (tC=30%).

   	A	$50 m
   	B	$120 m
   	C	$150 m
   	D	$300 m
   	E	$500 m

1 points

QUESTION 60

1. What is the total market value of the firm's assets after the firm adds $500 million debt to repurchase shares?

   	A	$1650 m
   	B	$1750 m
   	C	$1850 m
   	D	$2000 m
   	E	$2100 m

1 points

QUESTION 61

1. What is the total market value of the firm's equity after the firm adds $500 million debt to repurchase shares?

   	A	$850 m
   	B	$1050 m
   	C	$1150 m
   	D	$1550 m
   	E	$1750 m

1 points

QUESTION 62

1. At what price should the firm repurchase the stock per share?

   	A	$70
   	B	$75
   	C	$77.5
   	D	$80
   	E	$82.5