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1.                    Explain why a hotel company might have a higher proportion of debt in

its capital structure relative to a drug company.


2.                    According to Modigliani and Miller (M&M), in a world of perfect capital markets, what will be the expected equity return (or cost of equity) for a firm that has a cost of capital of 10 percent, a cost of debt of 6 percent, debt valued at $1.2 million, and equity valued at $1.0 million?


3.                    Suppose a firm has $10 million in debt that it expects to hold in perpetuity. If the interest rate is 7 percent and the corporate tax rate is 35 percent, what is the value of the interest tax shield?


4.                    What is the value of an all-equity firm that: has a dividend payout ratio of 100 percent, is expected to generate net income each year (forever) of $1 million, and has a required equity return (also the ROE) of 16 percent?

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Q. 1
Explain why a hotel company might have a higher proportion of debt in its capital structure relative to a drug company.
The financial leverage is positively associated with financial risk . A...

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