1. Firm L has debt with a market value of $200,000 and a yield of 9%. The firm's equity has a
market value of $300,000, its earnings are growing at a rate of 5%, and its tax rate is 40%. A
similar firm with no debt has a cost of equity of 12%. Under the MM extension with growth, what
is Firm L's cost of equity?
a. 11.4%
b. 12.0%
c. 12.6%
d. 13.3%
e. 14.0%
2. Your firm has debt worth $200,000, with a yield of 9%, and equity worth $300,000. It is growing
at a 5% rate, and its tax rate is 40%. A similar firm with no debt has a cost of equity of 12%.
Under the MM extension with growth, what is the value of your firm’s tax shield, i.e., how much
value does the use of debt add?
a. $92,571
b. $102,857
c. $113,143
d. $124,457
e. $136,903
3. Your firm has debt worth $200,000, with a yield of 9%, and equity worth $300,000. It is growing at a
5% rate, and its tax rate is 40%. A similar firm with no debt has a cost of equity of 12%. What is
the value of the firm according to MM with corporate taxes?
a. $475,875
b. $528,750
c. $587,500
d. $646,250
e. $710,875
4. Gomez computer systems has an EBIT of $200,000, a growth rate of 6%, and its tax rate is 40%.
In order to support growth, Gomez must reinvest 20% of its EBIT in net operating assets. Gomez
has $300,000 in 8% debt outstanding, and a similar company with no debt has a cost of equity of
11%.
According to the MM extension with growth, what is the value of Gomez’s tax shield?
a. $156,385
b. $164,616
c. $173,280
d. $182,400
e. $192,000
5. Trumbull, Inc., has total value (debt plus equity) of $500 million and $200 million face value of 1-
year zero coupon debt. The volatility ( ) of Trumbull’s total value is 0.60, and the risk-free rate is
5%. Assume that N(d1) = 0.9720 and N(d2) = 0.9050.
What is the value (in millions) of Trumbull’s equity if it is viewed as an option?
a. $228.77
b. $254.19
c. $282.43
d. $313.81
e. $345.19
tero baje randi
32424
c=12.6%
1. In order to calculate Firm L's cost of equity using the MM extension with growth, we need to use the formula:
Cost of equity = Cost of equity of an unlevered firm + (Debt/Equity) * (Cost of debt - Tax rate)
First, we need to calculate the cost of equity of an unlevered firm. Given that a similar firm with no debt has a cost of equity of 12%, we can use this value.
Cost of equity of an unlevered firm = 12%
Next, we calculate the debt/equity ratio of Firm L:
Debt/Equity = Debt / Equity = $200,000 / $300,000 = 0.67
Given that the yield on debt is 9% and the tax rate is 40%, we can substitute these values into the formula:
Cost of equity = 12% + (0.67) * (9% - 40%) = 12% + (-20.13%) = 11.87%
Rounding to the nearest tenth, Firm L's cost of equity is approximately 11.9%. Therefore, the answer is not provided among the given choices.
2. To calculate the value of the firm's tax shield, we need to use the formula:
Tax shield = Debt * Tax rate
Given that the debt is $200,000 and the tax rate is 40%, we can substitute these values into the formula:
Tax shield = $200,000 * 40% = $80,000
Therefore, the value of the firm's tax shield is $80,000. Therefore, the answer is not provided among the given choices.
3. To calculate the value of the firm according to MM with corporate taxes, we need to use the formula:
Value of the firm = Value of debt + Value of equity
First, let's calculate the value of the debt. Given that the debt is $200,000 and the yield is 9%, we can calculate its present value by dividing the yield by (1 - tax rate):
Value of debt = $200,000 / (1 - 0.40) = $333,333.33
Next, let's calculate the value of equity. Given that the equity is $300,000 and the earnings are growing at a rate of 5%, we can use the formula:
Value of equity = Earnings / (Cost of equity - Growth rate)
Cost of equity = Cost of equity of an unlevered firm + (Debt/Equity) * (Cost of debt - Tax rate) = 12% + (0.67) * (9% - 40%) = 11.87%
Value of equity = ($300,000 * (1 + 5%)) / (11.87% - 5%) = $3,021,978.02
Finally, we can calculate the value of the firm:
Value of the firm = Value of debt + Value of equity = $333,333.33 + $3,021,978.02 = $3,355,311.35
Therefore, the value of the firm according to MM with corporate taxes is approximately $3,355,311.35. Therefore, the answer is not provided among the given choices.
4. To calculate the value of Gomez's tax shield using the MM extension with growth, we need to use the formula:
Tax shield = (Tax rate) * (Reinvestment rate) * (Cost of debt)
Given that the tax rate is 40%, Gomez must reinvest 20% of its EBIT, and the cost of debt is 8%, we can substitute these values into the formula:
Tax shield = 40% * 20% * 8% = 6.4%
To calculate the value of the tax shield, we need to divide the tax shield by (1 - tax rate):
Value of the tax shield = 6.4% / (1 - 40%) = 10.67%
Rounding to the nearest hundredth, the value of Gomez's tax shield is approximately 10.67%. Therefore, the answer is not provided among the given choices.
5. To calculate the value of Trumbull's equity as an option, we need to use the Black-Scholes model for option pricing:
Value of equity = Value of the firm - Value of debt
Given that the total value of the firm is $500 million and the face value of debt is $200 million, we can calculate the value of equity:
Value of equity = $500 million - $200 million = $300 million
Therefore, the value of Trumbull's equity, viewed as an option, is $300 million. Therefore, the answer is not provided among the given choices.