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Weighted Average Cost of Capital (WACC) Assignment | Homework For You

Evaluate the statement that the weighted average cost of capital (WACC) for a company (assuming that all three assumptions of Modigliani and Miller’s propositions hold) is always less than or equal to the cost of equity for the company.
16.4 M & M Proposition 1:  Cerberus Security produces a cash flow of $200 and is expected to continue doing so in the infinite future. The cost of equity capital for Cerberus is 20 percent, and the company is financed totally with equity. The company would like to buy back $100 in shares by borrowing $100 at a 10 per cent rate (assume that the debt will also be outstanding into the infinite future). Using Modigliani and Miller’s Proposition 1, what is the value of the company today, and what will be the value of the claims on the company’s assets after the share buy-back? What will be the rate of return on ordinary shares required by interest after the share buy-back?

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16.5 M & M Proposition 1: A company financed completely with equity currently has a cost of capital equal to 15 per cent. If Modigliani and Miller’s Proposition 1 holds and the company is thinking about changing its capital structure to 50 per cent debt and 50 per cent equity, then what will be the cost of equity after the change if the cost of debt is 10 per cent?

16.7 M & M Proposition 1: The weighted average cost of capital for a company, assuming all three Modiglioni and Miller assumptions hold, is 10 per cent. What is the current cost of equity capital for the company if the cost of debt for the company is 8 per cent, given that the company is financed by 80 per cent debt?
Evaluate the statement that the weighted average cost of capital (WACC) for a company (assuming that all three assumptions of Modigliani and Miller’s propositions hold) is always less than or equal to the cost of equity for the company.
16.4 M & M Proposition 1:  Cerberus Security produces a cash flow of $200 and is expected to continue doing so in the infinite future. The cost of equity capital for Cerberus is 20 percent, and the company is financed totally with equity. The company would like to buy back $100 in shares by borrowing $100 at a 10 per cent rate (assume that the debt will also be outstanding into the infinite future). Using Modigliani and Miller’s Proposition 1, what is the value of the company today, and what will be the value of the claims on the company’s assets after the share buy-back? What will be the rate of return on ordinary shares required by interest after the share buy-back?

16.5 M & M Proposition 1: A company financed completely with equity currently has a cost of capital equal to 15 per cent. If Modigliani and Miller’s Proposition 1 holds and the company is thinking about changing its capital structure to 50 per cent debt and 50 per cent equity, then what will be the cost of equity after the change if the cost of debt is 10 per cent?

16.7 M & M Proposition 1: The weighted average cost of capital for a company, assuming all three Modiglioni and Miller assumptions hold, is 10 per cent. What is the current cost of equity capital for the company if the cost of debt for the company is 8 per cent, given that the company is financed by 80 per cent debt? Get Finance homework help today

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