Question #25032

1. 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

2. 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

a. $156,385

b. $164,616

c. $173,280

d. $182,400

e. $192,000

2. 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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