公司金融作业题答案.doc

ted average of its earnings estimates: Expected Value = ($1,000)(0.10) + ($2,000)(0.40) + ($4,200)(0.50) = $3,000 Frodo’s expected operating income every year is $3,000. Since Frodo’s expected operating income will remain unchanged into perpetuity and the required return on the firm’s unlevered equity is 20%, the value of Frodo in a world without taxes is: VU = Expected (Operating Income) / r0 = $3,000 / 0 .20 = $15,000 The value of Frodo in a world without taxes is $15,000. b. i. Modigliani-Miller Proposition I states that in a world without corporate taxes: VL = VU where VL = the value of a levered firm VU = the value of an unlevered firm Changes in capital structure have no effect on the value of a firm in a world without taxes. Therefore, if Frodo issues $7,500 of 10% debt and uses the proceeds to repurchase equity, the value of the firm will remain at $15,000 in a world without taxes. In a world without taxes, the value of Frodo will remain at $15,000. ii. The value of a levered firm equals the market value of its debt plus the market value of its equity. VL = B + S The total value of Frodo (VL) is $15,000, and the market value of the firm’s debt (B) is $7,500. Therefore, the value of Frodo’s equity is: S = VL – B = $15,000 - $7,500 = $7,500 The market value of Frodo’s equity equals $7,500 in a world without taxes. iii. According to Modigliani-Miller Proposition II (No Taxes): rS = r0 + (B/S)(r0 – rB) where r0 = the required rate of return on the equity of an unlevered firm rS = the required rate of return on the equity of a levered firm rB = the cost of debt In this problem: r0 = 0.20 rB = 0.10 B = $7,500 S = $7,500 The required rate of return on Frodo’s levered equity is: rS = r0 + (B/S)(r0 – rB) = 0.20 + ($7,500 / $7,500)(0.20 – 0.10) = 0.20 + (1)(0.20-0.10) = 0.30 The required rate of return on Frodo’s levered equity is 30%. iv. In the absence of