Problem 1 (20 marks) Williams Inc is an all equity financed firm operating in Nova Scotia The firm has 1,000,000 shares outstanding trading for $25 per share Additionally, the firm plans to pay all its future earnings as cash dividends to its shareholders The current return on Government of Canada T Bills is 2 , the return on the market portfolio is 10 and Williams estimated beta is 1 20 Part 1 Consider a world with no taxes and no bankruptcy costs What is the market value of Williams Inc (remember 3 decimal places) (1 mark) According to CAPM, what is the cost of equity for Williams Inc (2 mark) What is the WACC for Williams Inc (2 mark) Williams Inc is considering borrowing $1,000,000 at 5 and using the proceeds to repurchase some shares Briefly explain in words using the numbers as part of your decription, the impact this will have on the market value of the firm and on the WACC (2 mark)

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Question: Problem 1: (20 marks) Williams Inc is an all equity financed firm operating in Nova Scotia. The firm has 1,000,000 shares outstanding trading for $25

Problem 1: (20 marks)

Williams Inc is an all equity financed firm operating in Nova Scotia. The firm has 1,000,000 shares outstanding trading for $25 per share. Additionally, the firm plans to pay all its future earnings as cash dividends to its shareholders.

The current return on Government of Canada T-Bills is 2%, the return on the market portfolio is 10% and Williams estimated beta is 1.20.

Part 1: Consider a world with no taxes and no bankruptcy costs:

What is the market value of Williams Inc? (remember 3 decimal places). (1 mark)

According to CAPM, what is the cost of equity for Williams Inc? (2 mark)

What is the WACC for Williams Inc? (2 mark)

Williams Inc is considering borrowing $1,000,000 at 5% and using the proceeds to repurchase some shares. Briefly explain in words using the numbers as part of your decription, the impact this will have on the market value of the firm and on the WACC. (2 mark)

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