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valentinak56 [21]
3 years ago
15

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 earning

s 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?
Business
1 answer:
Norma-Jean [14]3 years ago
5 0

Answer:

Firm L's cost of equity is 13.2%

Explanation:

In order to calculate Firm L's cost of equity we would have to calculate the following formula:

Firm L's cost of equity=Unlevered cost of equity+D/E*( Unlevered cost of equity-cost of debt)*(1-tax rate)

D/E = debt/equity

D/E = $200,000/$300,000

D/E=0.6666

Therefore, Firm L's cost of equity= 12%+0.6666*(12%-9%)*(1-0.4)

Firm L's cost of equity=13.2%

Firm L's cost of equity is 13.2%

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2 years ago
A city that is attempting to attract a professional football team is planning to build a new stadium costing $500 million. Annua
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Capitalized cost = - $510,758,686.20

Explanation:

Interest rate = r = 10%, or 0.10

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Present value of the replacement cost of artificial turf  every 20 years = ($2,000,000 * (r / (((1 + r)^20) - 1)) / r = ($2,000,000 * (0.10 / (((1 + 0.10)^20) - 1)) / 0.10 = $349,192.50

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