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A firm has the following capital structure £100 million

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A firm has the following capital structure £100 million

 

c) A firm has the following capital structure: £100 million of equity (market value) with 100 million shares outstanding, and £100 million of debt. The beta of the firm’s stock is 1.6. The firm’s cost of equity is 10 percent, and the yield on riskless bonds is 2 percent. There is no tax. Assuming that the firm can borrow at the risk free rate and that both CAPM (Capital Asset Pricing Model) and the Modigliani-Miller theorem hold, answer the following questions. i) What is the share price of the firm? ii) What is the WACC of the firm? iii) What should be the expected return on the market portfolio? iv) Suppose the firm changes its capital structure so that its debt increases to £140 million, and the equity decreases to £60 million. What should be the firm’s cost of equity after the change?

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A firm has the following capital structure £100 million

Perfect A firm has the following capital structure £100 million

A firm has the following capital structure £100 million

 

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