Question 4 b

is it everything just constant in the MM world?

Problem 4: Capital Structure Theory (16 Points) Assume a Modigliani Miller world without taxes and insolvency costs. You calculated the value of a company called StoneSpring yesterday evening to present to your boss today. StoneSpring will only remain in business for one more year, i.e. there will only be cash flows coming in in t=1. Unfortunately, you spilled some whiskey on your notes and are now missing some basic information. You still know the following: 0 Market Value of StoneSpring today: 250,000 - WACC of StoneSpring: 0.09 0 Expected return of the market: 0.12 o Risk-free rate: 0.06 a) Based on the information provided above, calculate StoneSpring's unlevered equity beta and its expected cash ow one year in the future. (8 points) Assume now that StoneSpring has issued debt that is due next year. b) How does this inuence the (levered) equity beta, the required return on equity, the WACC, and today's market value of StoneSpring? Indicate for each variable if it increases, decreases or stays constant and also provide a short reasoning. Calculations are not required. (8 points) Problem 5: Company Valuation Theory (6 Points) In the lecture, you have learned about the Adjusted Present Value (APV) - approach. The formula underlying this approach is given below in its general form. V_ ZE(CF,)(1r)+ E(CFT+1)(1 1'.) 1 +ir- RD-D,_1 +T-RD -D,_ 1 (1 + WACC)' WACC (1 + WACC)T 1:1 (1 + RD)': RD (1 + RD)T %Yi i i Y Part 1 Part 2 a) State the names and explain the economic meaning of the two parts in the APV formula which are denoted by \"Part 1\" and \"Part 2\". (6 points)