In M&M - Land there are no corporate income taxes, bankruptcy costs, or agency costs. The market
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Question:
In M&MLand there are no corporate income taxes, bankruptcy costs, or agency costs. The market
value of MillerMart Corps assets is $ million. MillerMart has bonds outstanding. The
bonds are trading at par and their coupon rate is each bond has a $ face value and
coupons are paid annually MillerMarts levered equity cost of capital is rE Government
risk free bills pay interest and the market risk premium in M&MLand equals
a What is the beta of MillerMart stock? Hint: use the CAPM.
b What is MillerMarts weighted average cost of capital rWACC
c What would MillerMarts weighted average cost of capital rWACC be if the firm were
equity financed?
d Suppose MillerMart sells annual coupon bonds, increasing the number of Miller
Mart bonds outstanding to and uses the proceeds to repurchase shares. The new bonds
are sold at par. Calculate MillerMarts equity cost of capital rE after the refinancing.
e What is the beta of MillerMart stock after the refinancing? Comment on whether and why it
is higher or lower than the beta calculated in part a
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