Topic 9 Warm Up Problems

Topic 9 Warm Up Problems - the company is equity financed 5...

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Warm up Problems for Topic 9 (Leverage) **These questions are designed to represent elementary principles, and are NOT representative of problems that you will find on any exams. 1. What is the WACC of a company which is 25% debt financed has a return on equity of 18% and a return on debt that is 8%? 2. If a company has an asset beta of 1.4 and a return on assets of 14%, what is the market risk premium if the risk free rate is 6%? 3. If the same company from question 2 is 80% equity financed and has a debt beta of 0, what is the equity beta? 4. If a company has a return on debt of 7%, a return on equity of 12% and an asset return of 10%, what percent of
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Unformatted text preview: the company is equity financed? 5. Company X is 100% equity financed and has a return on equity of 12%. Management decides to buyback 25% of the outstanding shares. The transaction is debt financed. If the return on debt is 6%, what is the return on assets? return on equity? 6. Company Y is 75% equity financed. The asset beta is 1.2 and the debt beta is 0. What is the equity beta of the company? 7. If the risk free rate is 5% and the market risk premium is 8%, and given the information from question 6, 7i) what is the return on debt of the company? 7ii) what is the return on equity? 7iii) what is the WACC?...
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