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 Value100Debt (D)40
Equity (E)60
Total Asset value100Firm Value100

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]

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