Question 8

A firm has a debt-equity ratio of 1.0. The required return on the firms assets is 16.1% and the pre-tax cost of debt is 9.1%. Ignore taxes. What is the firms cost of equity?

		15.3%
		18.2%
		23.1%
		21.7%

Question 9

A company is an all-equity firm that has projected earnings before interest and taxes (EBIT) of $500,000 forever. The current cost of equity rs = 10% and the tax rate T = 30%. The company is in the process of issuing $1.5 million of bonds at par that carry a 6% annual coupon. What is the unlevered value of the firm (in millions)? (Note: You should use MM capital structure model with corporate taxes, but without personal taxes and bankruptcy costs. The formula for the value of unlevered firm: VU = EBIT x (1-T) / rs)._______

		$2.05 million
		$2.23 million
		$2.86 million
		$3.50 million

Question 10

According to the information from Question 9, what is the levered value of the firm (in millions)? (Note: The value of levered firm VL = VU + Present value of annual interest tax shield)_______

		$3.95 million
		$3.76 million
		$3.22 million
		$2.96 million