The balance sheet of a company consists of assets with a value of £200m, debt with a value of £90m, and equity with a va
Posted: Wed Mar 09, 2022 8:48 am
The balance sheet of a company consists of assets with a value
of £200m, debt with a value of £90m, and equity with a value of
£110m. The risk-free rate is 3%, and the average return on the
market index is 7%. You should assume that Modigliani-Miller's
irrelevance of capital structure holds for questions a) and b).
Answer the following questions: a) The beta of the debt is 0.2, and
the beta of the equity is 1.4. What is the weighted average cost of
capital for the firm? (10 marks) b) Suppose the firm rebalances its
borrowing by issuing £10m more in debt used to buy back £10m worth
of equity. The beta of the debt remains at 0.2 after the
recapitalization. What is the new beta of the equity? (10 marks) c)
Explain why trade-off theory and pecking order theory predict that
capital structure matters. (10 marks).
of £200m, debt with a value of £90m, and equity with a value of
£110m. The risk-free rate is 3%, and the average return on the
market index is 7%. You should assume that Modigliani-Miller's
irrelevance of capital structure holds for questions a) and b).
Answer the following questions: a) The beta of the debt is 0.2, and
the beta of the equity is 1.4. What is the weighted average cost of
capital for the firm? (10 marks) b) Suppose the firm rebalances its
borrowing by issuing £10m more in debt used to buy back £10m worth
of equity. The beta of the debt remains at 0.2 after the
recapitalization. What is the new beta of the equity? (10 marks) c)
Explain why trade-off theory and pecking order theory predict that
capital structure matters. (10 marks).