Assume a firm’s debt is risk-free, so that the cost of debt equals the risk-free rate, Rf . Define βA as the firm’s asset beta, that is, the systematic risk of the firm’s assets. Define βS to be the beta of the firm’s equity. Use the capital asset pricing model, CAPM, along with MM Proposition II to show that βS = βA × (1 + B / S ), where B / S is the debt-equity ratio. Assume the tax rate is zero.
Answer to relevant QuestionsSuppose the company in Problem 1 has a market-to-book ratio of 1.0. a. Calculate return on equity, ROE, under each of the three economic scenarios before any debt is issued. Also, calculate the percentage changes in ROE for ...Ignoring taxes in Problem 6, what is the price per share of equity under Plan I? Plan II? What principle is illustrated by your answers? In problem a. Ignoring taxes, compare both of these plans to an all-equity plan ...Dragula, Inc., has debt outstanding with a face value of $3.8 million. The value of the firm if it were entirely financed by equity would be $12.3 million. The company also has 245,000 shares of stock outstanding that sell ...The net income of Novis Corporation is $90,000. The company has 35,000 outstanding shares, and a 100 percent payout policy. The expected value of the firm one year from now is $1,650,000. The appropriate discount rate for ...The company with the common equity accounts shown here has declared a 12 percent stock dividend at a time when the market value of its stock is $44 per share. What effects on the equity accounts will the distribution of the ...
Post your question