Which one of the following statements is correct?
| To maximize the value of a firm you need to maximize the firm’s WACC. | |
| A Chapter 7 bankruptcy is a legal process for reorganizing a firm. | |
| Investors can use homemade leverage to offset firm leverage. | |
| To maximize the value of a firm you need to borrow as much as you can. |
2. A firm has 100,000 shares of stock outstanding. The firm is considering borrowing $1.3 million at 7.5% interest and using the loan proceeds to repurchase 25,000 shares of stock. What is the value of the firm? Ignore taxes.
| $5.20 million | |
| $5.98 million | |
| $6.50 million | |
| $7.25 million |
3. A firm has a debt-equity ratio of 1.0. The required return on the firm’s assets is 16.1% and the pre-tax cost of debt is 9.1%. Ignore taxes. What is the firm’s cost of equity?
| 15.3% | |
| 18.2% | |
| 23.1% | |
| 21.7% |
4. 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 is 15% and the tax rate is 33%. 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.)
| $2.05 million | |
| $2.23 Million | |
| $2.56 Million | |
| $2.85 Million |
5. From Question 4, what is the levered value of the firm (in millions)?_______
| $2.05 million | |
| $2.36 million | |
| $2.56 million | |
| $2.73 million |
- 9 years ago
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