Assignment 3

# Assignment 3 - ASSIGNMENT3 DueonDecember10 1 AlphaInc..The...

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ASSIGNMENT 3 Due on December 10 1. Alpha Inc. operates in a world with zero taxes and no financial distress cost. The  debt/equity ratio of the firm is 1.5. The cost of equity of Alpha is 18%. Beta Inc. which is  identical in all respects to Alpha Inc. except that it is an all equity firm. Beta Inc.’s cost of  equity is 12%. What is the cost of debt of Alpha Inc.? A. 8% B. 9% C. 10% D. 11% E. 12% 2. Gamma Inc.’s cost of equity is 20%. The cost of  unlevered  equity is 15%. The before-tax  cost of debt is 10%, and the tax rate is 35%. What is the debt/ equity ratio of Gamma? 3. XYZ has a debt equity ratio of 1.5. The cost of debt is 7% and the cost of equity is 16%.  The firm has a perpetual EBIT of \$15,000. There are no taxes. What is the value of the  firm? (Hint: If the debt/equity ratio is 1.5, the weight of debt is 1.5/(1 + 1.5), and the  weight of equity is 1/(1 + 1.5))

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4. ABC and XYZ are similar in all aspects except their debt/equity ratios. ABC has a debt/  equity ratio of 1.2, cost of equity of 15%, and before-tax cost of debt of 7%. The tax rate  for both firms is 30%. What is the cost of equity of XYZ if it has a debt/equity ratio of 1.8?
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