Please Answer ALL Questions Question 5 The ABC company is unlevered and is value
ID: 2821658 • Letter: P
Question
Please Answer ALL Questions
Question 5
The ABC company is unlevered and is valued at $1,280,000. There are currently 32,000 shares outstanding and effective marginal tax bracket is zero. ABC is currently deciding whether including debt in its capital structure would increase its value. The current cost of equity is 12%. And cost of debt is 7% ABC wants to repurchase 2,800 shares. What is the value of new debt?
$29,200
$112,000
$1,280,000
$1,280,000
$32,000
Question 6
A firm has a cost of debt of 9 percent and a cost of equity of 16 percent. The debt-equity ratio is 0.7. There are no taxes. What is the firm’s weighted average cost of capital?
11.01 percent
13.12 percent
10.97 percent
11.82 percent
9.46 percent
Question 14
ABC has a debt-equity ratio of 1.8. The firm’s weighted average cost of capital is 15% and its pre-tax cost of debt is 8.6%. Assume no taxes. What is ABC’s cost of equity capital (Rs)?
$29,200
Explanation / Answer
5)
Value of new debt:
= Number shares repurchased×Share price
= 2,800×($1,280,000/32,000)
= $112,000
Hence, correct option is $112,000