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?