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S07Assg9

# S07Assg9 - FIN 2200 CORPORATION FINANCE Sum 2007...

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FIN 2200 – CORPORATION FINANCE Sum 2007 Assignment #9 Professors: A. Dua NOTE: This assignment is to be handed in! Only Problems 1, 3, 5, and 6 will be marked? The scores will only be given for the final answer 1. Assume an M&M world with no taxes. The risk free rate of return is 4% and the market risk premium is 10%. XYZ Corporation could be financed with debt and equity according to the proportions specified in the table below. Fill in all the missing cells in the table below. Proportion of Equity Financing for XYZ Expected Return on XYZ’s Equity Expected Return on XYZ’s Debt XYZ’s WACC % XYZ’s Equity Beta XYZ’s Debt Beta Weighted Average Beta of XYZ’s securities 100% (no debt) 1.20 (no debt) 80% 18.7% 1.47 0.12 60% 23.2% 0.12 50% 26.8% 2.28 0.12 40% 6.6% 0.26 30% 34.2% 8.2% 3.02 20% 10% 0.60 10% 52% 12% 4.80 0.80 5% 14% 1.00 0% (no equity) 16% (no equity) 2. Use the data from #1 and plot XYZ’s expected equity return, its expected debt return, and its expected weighted average cost of capital on the graph below. Label your lines appropriately.

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