ps2 - ECON 6100S Corporate Finance(Prof Fei DING Problem...

Info icon This preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
1 ECON 6100S: Corporate Finance (Prof. Fei DING) Problem Set 2 You can work in groups of 5 people or less. Hand in one solution per group in hard copy before class on the specified due date. Late problem sets are not accepted. Problem 1. Arc Levers is financed by a mixture of debt and equity. You have the following information about its cost of capital. r E = ? r D = 12% r A = ? E = 1.5 D = ? A = ? r F = 10% r M = 18% D/V = 0.5 (a) Please fill in the blanks. (b) Suppose now that Arc repurchases debt and issues equity so that D/V = 0.3. This reduced borrowing causes r D to fall to 11%. How do the other variables change? Problem 2. Knar Co. pays no taxes and is financed entirely by common stock. The stock has a beta of 0.8 and a price-earnings ratio of 12.5 and is priced to offer an 8% expected return. Knar now decides to repurchase half the common stock and substitute an equal value of debt. If the debt yields a riskfree 5% return, calculate: (a) The beta of the common stock after the refinancing; (b)
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern