Capital Structure and Leverage 28

Capital Structure and Leverage 28 - premium is 6 percent....

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Old Exam Questions - Capital Structure and Leverage Page 28 of 31 Pages premium is 6 percent. The company’s beta is currently 1.10, but its investment bankers estimate that the company’s beta would rise to 1.20 if it proceeds with the recapitalization. Assume that the market does not anticipate an increase in value when the firm announces that it will recapitalize, so that the firm is able to repurchase all shares at the current price per share. Given this information, determine what the new equilibrium price will be after the recapitalization is completed and the market does realize that additional value has been created. A. $59.60 B. $59.20 C. $59.80 D. $59.40 E. $59.00 51. Assume that the risk-free rate is 5.00 percent, the return on the market is 12.00 percent, the tax rate is 40 percent, and that a firm’s cost of stock, using the CAPM/SML, is 15.08 percent [HINT: you should now be able to determine the firm’s levered beta.] Also assume that the firm’s unlevered beta has a value of 0.90 [HINT:
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This note was uploaded on 07/13/2011 for the course FIN 4414 taught by Professor Staff during the Spring '08 term at University of Florida.

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