Homework_5 - FIN340 HOMEWORK #5 WACC AND CAPITAL STRUCTURE...

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FIN340 HOMEWORK #5 WACC AND CAPITAL STRUCTURE 1. Leverage Inc. has $1,200 debt. The cost of debt is 10%. Its current stock price is $4 with 1,200 shares outstanding. The equity has a beta of 1.4. The expected return on the market portfolio is 13% and the risk-free rate is 4%. Suppose the corporate tax rate is 30%, but there are no other market imperfections. Perform the following calculations. a) Market risk premium. b) The firm’s cost of equity. c) The portion of the cost of equity attributable to the firm’s business risk. d) The portion of the cost of equity attributable to the firm’s financial risk. e) The weighted average cost of capital (WACC). Suppose Leverage Inc. repurchases stock and finances the repurchase with debt so that its new debt-to-equity ratio changes to D/E =0.5. f) The firm’s new cost of equity. g) The firm’s new weighted average cost of capital (WACC). 2. Assume that the WACC incorporating all costs and benefits of debt for Abracadabra Inc. is 15%, the cost of capital for the firm if it had no debt is 16%, the nominal free cash
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Homework_5 - FIN340 HOMEWORK #5 WACC AND CAPITAL STRUCTURE...

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