Possible answers are given, can someone show the steps, thanks M&M Proposition 2
ID: 2623928 • Letter: P
Question
Possible answers are given, can someone show the steps, thanks
M&M Proposition 2: Suppose that Banana Computers has $1,000 in revenue this year, along with COGS of $400 and SG&A of $100. The required rate of return on its equity is 14%, and the risk-free rate is 5%. Assume that the COGS only includes the marginal costs of selling a computer. Banana is considering adding $700 worth of debt with a coupon rate of 5% and a YTM of 7.9% to its capital structure.
What is the net income of Banana without and with the debt?
$484.2 and $500
$490 and $500
$500 and $484.2
$500 and $465
$484.2 and $500
Explanation / Answer
$500 and $465
$1000 Rev - $400 Cogs - $100 SG&A = $500 before debt
$500 - (5%*700) = 465