Problem 3: Alias Industries is currently an all-equity firm. In the coming year the firm is forecasting annual EBIT level $580,000. The firm expects no growth in the EBITs as it will pay all the earnings in cash dividends to its shareholders. As a result, the EBIT level of $580,000 will remain constant forever. The asset beta of the firm has an estimated value of 1.25. The expected return on a Government of Canada treasury bill is 2.2%, and the return on the TSX composite index is 7.6%. The firm has 260,000 shares of common stock outstanding. M&M Case I: no tax and no default risk. Assume cost of debt is 2.2%. a) What is the WACC of this all-equity financed firm? What is the value of the firm?

Problem 3: Alias Industries is currently an all-equity firm. In the coming year the firm is forecasting annual EBIT level $580,000. The firm expects no growth in the EBITs as it will pay all the earnings in cash dividends to its shareholders. As a result, the EBIT level of $580,000 will remain constant forever. The asset beta of the firm has an estimated value of 1.25. The expected return on a Government of Canada treasury bill is 2.2%, and the return on the TSX composite index is 7.6%. The firm has 260,000 shares of common stock outstanding. M&M Case I: no tax and no default risk. Assume cost of debt is 2.2%. a) What is the WACC of this all-equity financed firm? What is the value of the firm?

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EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter14: Capital Structure Management In Practice

Section: Chapter Questions

Problem 27P

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