To work out the firms equity cost of capital and the debts promised rate of return, imitate the payoff tables from the text (dollars are in millions) The debts promised rate of return is $100 $79 37 1 26 Scheme AE Bond Scheme DE Levered Equity 100 Equity (promises $100) (after $100 obligation) Prob...

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To work out the firms equity cost of capital and the debts promised rate of return, imitate

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To work out the firm’s equity cost of capital and the debt’s promised rate of return, imitate the payoff tables from the text (dollars are in millions): image text in transcribed

The debt’s promised rate of return is $100/$79.37 − 1 ≈ 26%.

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Corporate Finance An Introduction

ISBN: 9780321277992

1st Edition

Authors: Ivo Welch

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Question Posted: Oct 26, 2024 04:02 AM

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To work out the firms equity cost of capital and the debts promised rate of return, imitate

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Scheme AE Bond Scheme DE Levered Equity 100% Equity (promises $100) (after $100 obligation) Prob=1/3 $50 $50 $50 $0 Prob 1/3 $150 $150 $100 $50 Prob=1/3 $400 $400 $100 $300 Future Payoff $200 $83.33 $116.67 Price P Today $181.82 $79.37 $102.45 Rate of Return (E(+)) 10% 5% 13.88%

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Corporate Finance An Introduction

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