A firm is in an MM world with perfect capital markets. A can borrow at a...

 

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A firm is in an MM world with perfect capital markets. A can borrow at a 5% annual interest rate and has an unlevered WACC of 7%. The firm currently has a total value of $1m with no debt. (a) Calculate and plot the firm's required return on equity, and WACC in an MM world without taxes for a debt to value ratio of 0 to 90% at 10% increments. (b) Calculate and plot the firm's required return on equity, and WACC in an MM world with a tax rate of 28%, for a debt to value ratio of 0 to 90% at 10% increments. (c) Plot the value of the firm under the above debt to value ratios for an MM world with and without taxes, if the overall assets remains at $1m only the funding of the assets change. A firm is in an MM world with perfect capital markets. A can borrow at a 5% annual interest rate and has an unlevered WACC of 7%. The firm currently has a total value of $1m with no debt. (a) Calculate and plot the firm's required return on equity, and WACC in an MM world without taxes for a debt to value ratio of 0 to 90% at 10% increments. (b) Calculate and plot the firm's required return on equity, and WACC in an MM world with a tax rate of 28%, for a debt to value ratio of 0 to 90% at 10% increments. (c) Plot the value of the firm under the above debt to value ratios for an MM world with and without taxes, if the overall assets remains at $1m only the funding of the assets change.

Answer rating: 100% (QA)

a In an MM world without taxes the weighted average cost of capital WACC remains constant because it is based on the unlevered cost of equity The firm... View the full answer