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Unformatted text preview: Question 1 The capital structure of BIG Company has $10 billion of debt, $3 billion of preferred stock, and $15 billion of equity. The average tax rate is 40%. The before tax cost of debt is 7% and the before tax cost of preferred stock is 9%. The expected return is 15%, but the required return for equity is 13% from CAPM. What is the WACC? Question 2 Small Biz has 60.000 shares outstanding before financing. Also, the income before interest and taxes is $300.000. Company is seeking $1.400.000 in financing. If common stock is used, 140.000 shares will be issued. If debt is used, the interest rate on debt will be 9%. Tax rate is 32%. What is the difference in earning per share for equity versus debt financing? Question 3 Assume the economy consisted of three types of people. 50% are fad followers. 45% are passive investors, they have read the finance book and hold the market portfolio, and 5% are informed traders. The portfolio consisting of all the informed traders has a beta of 105 and an informed traders....
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This note was uploaded on 09/09/2010 for the course ACCOUNTING 2345 taught by Professor Dr.ijueh during the Spring '10 term at twsu.edu.
- Spring '10