MAZON Inc. is unlevered with 500,000 of shares trading at $4 each. The next dividend paid is expected to be $0.45/share each year into perpetuity.

The value of the unlevered firm is (Answer: $1,000,000 / $2,000,000 / $3,000,000 / $4,000,000 )

and it’s cost of capital is ( Answer: 9.25% / 10.25% / 11.25% / 12.25%.)

Under consideration is issuing 40 bonds of Face value $10,000 each, that are expected to trade at par. The total amount of debt raised is Answer$400,000$500,000$600,000$700,000. These bonds pay a 6% p.a. coupon, semi-annually and have a maturity of 10 years. The cost of debt raised is Answer6%6.09%3%3.06%. MAZON would repurchase stock with the proceeds of the debt issue and pays 30% tax.

Given the proposed changes in capital structure:

The value of the levered firm will be: (Answer : $2,620,000 / $2,920,000 / $2,000,000 / $2,120,000.)

The equity of the levered firm will be: (Answer : $1,620,000 / $1,920,000 / $2,120,000 / $1,720,000.)

The new cost of equity for MAZON will be ( Answer: 12.09% / 13.09% / 14.09% / 15.09%.)

The levered firms new WACC will be ( Answer : 11.61% / 10.61% / 9.61% / 8.61%.)

Answer rating: 100% (QA)

To calculate the value of the unlevered firm we can use the formula for the perpetuity Value of unle... View the full answer