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QUESTION 17.30 ONLY PLEASE

Capital Structure in a Perfect Market Everything included, we just worked out: Financing Financing Scheme AE Scheme DE-1 Levered Equity 100% Equity Bond promises $76 after $76 Bond Prob ( Sun ) =3/4 $100 $100 $76 $24 Prob ( Rain ) =1/4 $60 $60 $60 $0 E Future Payoff $90 $72 $18 Price P Now $75 $65 $10 E Rate of Return 20% 10.77% 80% Financing Weight 100% $65/$75 ~ 87% $10/$75 ~ 13% w would the promised rate of return, the expected rate of return, and the debt-equit if the firm changed the amount it borrowed? Let's say the firm has explored the s and learned that in capital structure DE-2, a bond promising $88 in debt payments 70 today. (Trust me that this is consistent with the same economy-wide risk-aversbond promises an interest rate of 26%. If the firm's projects require an appropriate cost of capital of 10%, then what is the firm's levered equity cost of capital? Q 17.29. If a change in capital structure increases the risk both of the firm's equity and debt, and there are no other financial claims, does it imply that the firm's risk has increased? Q 17.30. Work the example from Page 462 (sun [$100] with 3/4 probability, rain [$60] with 1/4 probability), if the debt promises $65 and offers an expected rate of 3%. What is the weight of equity in the capital structure? Q 17.31. M&M states that, in a perfect market, although both debt and equity become riskier due to an increase in the firm's leverage, both the firm's value and risk remain exactly the same. Conceptually, what would it take for the firm to become worth more and/ or be safer even when