Question
SMU, Inc. has equity with a market value of $20 million and debt with a market value of $10 million. SMUpays 8% interest on its
SMU, Inc. has equity with a market value of $20 million and debt with a market value of $10 million. SMUpays 8% interest on its debt per year, and the expected return on the market portfolio over the next year is 18%. The beta of SMUs equity is .90. The firm pays no taxes.
a. What is SMUs debt to equity ratio? What is SMUs weighted average cost of capital?
b. What is the cost of capital for an otherwise identical all-equity firm?
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Personal Finance For Canadians
Authors: Elliot Currie, Thomas Chambers, Kathleen Brown
9th Edition
0132286750, 978-0132286756
