Question 1 The ABC company is unlevered and is valued at $1,280,000. There are c

Question

Question 1

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 cost of equity after recapitalization (new Rs)?

12.00%

12.48%

7.00%

9.48%

17.00%

Question 2

The legal and administrative costs of bankruptcy are called _____ bankruptcy costs

Question 3

A firm has a weighted average cost of capital of 8.59 percent, and a cost of equity of 11 percent. The debt-equity ratio is .65. There are no taxes. What is the firm’s cost of debt?

4.88 percent

5.23 percent

5.68 percent

5.01 percent

5.90 percent

12.00%

Explanation / Answer

1)

12.00%

the above is answer..

because there is no tax benefit, so leverage will not have any impact on the  cost of equity after recapitalization

2)

direct

the above is answer..

3)

WACC=(1/1.65)*11%+(0.65/1.65)*cost of debt after tax

8.59%=(1/1.65)*11%+(0.65/1.65)*cost of debt after tax

cost of debt after tax=(8.59%-((1/1.65)*11%))/((0.65/1.65))

=4.88%

the above is answer..

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