Unformatted text preview: firm’s tax rate is 40 percent, determine what the return on equity (ROE) will be after the buy back. A. 12.00% B. 12.50% C. 13.00% D. 13.50% E. 14.00% 60. Assume that the riskfree rate is 4.00 percent, the return on the market is 8.00 percent, the tax rate is 40 percent, and that a firm’s cost of stock, using the CAPM/SML, is 8.80 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 1.00 [HINT: you should now be able to use the Hamada equations to back out the firm’s current debt/equity ratio.] Assuming that the firm now doubles its debt/equity ratio, and using the Hamada equations to relever the firm’s beta, determine what the firm’s new cost of stock will be. A. 10.80% B. 10.00% C. 9,20% D. 10.40% E. 9.60%...
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 Spring '08
 Staff
 Debt, Leverage, Financial Ratio, Return on equity, ModiglianiMiller theorem, Hamada

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