Referring to table below, calculate the market value of firm L (without a corporate income tax) if the equity amount in its capital structure decreases to $5,000 and the debt amount increases to $5,000. At this capital structure, the cost of equity is 15 percent. Round your answer to the nearest dollar.     Firm U Firm L   Net operating income (EBIT)   $ 1,000   $ 1,000     Less: Interest payments to debt holders, I     -     100     Income available to stockholders (dividends), D   $ 1,000   $ 900     Total income available to security holders, I + D   $ 1,000   $ 1,000     Required rate of return on debt, kd     -     5 %   Market value of debt, B = I/kd     -   $ 2,000     Required rate of return on equity,ke     10 %   11.25 %   Market value of equity, E = D/ke   $ 10,000   $ 8,000     Market value of firm, E + B   $ 10,000   $ 10,000

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Referring to table below, calculate the market value of firm L (without a corporate income tax) if the equity amount in its capital structure decreases to $5,000 and the debt amount increases to $5,000. At this capital structure, the cost of equity is 15 percent. Round your answer to the nearest dollar.

 

  Firm U Firm L
  Net operating income (EBIT)   $ 1,000   $ 1,000  
  Less: Interest payments to debt holders, I     -     100  
  Income available to stockholders (dividends), D   $ 1,000   $ 900  
  Total income available to security holders, I + D   $ 1,000   $ 1,000  
  Required rate of return on debt, kd     -     5 %
  Market value of debt, B = I/kd     -   $ 2,000  
  Required rate of return on equity,ke     10 %   11.25 %
  Market value of equity, E = D/ke   $ 10,000   $ 8,000  
  Market value of firm, E + B   $ 10,000   $ 10,000  
                 

 

$   

 

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