Wolfrum Technology(WT) has no debt. Its assets will be worth $437 million one year from now if
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Question:
Wolfrum Technology(WT) has no debt. Its assets will be worth $437 million one year from now if the economy isstrong, but only $237 million in one year if the economy is weak. Both events are equally likely. The market value today of its assets is $258 million.
a. What is the expected return of WT stock withoutleverage?
b. Suppose therisk-free interest rate is 5%. If WT borrows $56 million today at this rate and uses the proceeds to pay an immediate cashdividend, what will be the market value of its equity just after the dividend ispaid, according toMM?
c. What is the expected return of WT stock after the dividend is paid in part (b)?
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