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Q8-Firm RK has no debt. Its assets will be worth $600 million in one year if the economy is strong, but only $300 million if
Q8-Firm RK has no debt. Its assets will be worth $600 million in one year if the economy is strong, but only $300 million if the economy is weak. Both events are equally likely. The market value today of Firm RK's assets is $400 million. Suppose the risk-free interest rate is 4%. If Firm RK borrows $150 million today at this rate and uses the proceeds to pay an immediate cash dividend, then according to M&M proposition 1, 1. Determine the market value of Firm RK's equity just after the dividend is paid. (10 pts.) 2. Determine the expected return of Firm RK's stock after the dividend is paid. (10 pts.)
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