Consider a firm with current value of $5,000,000 and outstanding debt of $4,000,000 that matures in 10

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Consider a firm with current value of $5,000,000 and outstanding debt of $4,000,000 that matures in 10 years. The firm's asset rate-of-retum variance is .5. The interest on the debt is paid at maturity, and the firm has a policy of not paying cash dividends. Use the OPM to determine the change in the prices of the firm's debt and equity if there is an unanticipated rise in the rate of inflation of 5%, which raises the riskless nominal interest rate from 5% to 10%. Which class of security holders benefits from the rise in rf?
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Financial Theory and Corporate Policy

ISBN: 978-0321127211

4th edition

Authors: Thomas E. Copeland, J. Fred Weston, Kuldeep Shastri

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