Answer to Question #24964 in Finance for marry

Question #24964
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
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