Q1: How does Perpetual Tax Shield work for the firm? [1 Mark]
Q2: Explain the concept of Financial Distress and Financial Slack.[1 Mark]Q3 A: Calculate the Cost of capital (Expected return on the assets) of a firm with following data.
Assignment Questions
Maximum Marks-05
Q1: How does Perpetual Tax Shield work for the firm? [1 Mark]
Q2: Explain the concept of Financial Distress and Financial Slack.[1 Mark]
Q3 A: Calculate the Cost of capital (Expected return on the assets) of a firm with following data.
[1.5 Marks]
Assets Value | 100 | Debt (D) | 40 |
– | – | Equity (E) | 60 |
Total Asset value | 100 | Firm Value | 100 |
Expected Return on the debt (rdebt) = 8%
Expected Return on the Equity (requity) = 16%
Q3B: What would be the situation if the same firm issued an additional 5% debt and used the cash to repurchase 5 % of its equity? Calculate the new expected rate of return on equity (requity), if debt holders are asking for 8.125% rdebt. [1.5 Marks]