DEVRY FIN 516 Week 2 Homework
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FIN 516 Week 2 Homework Problem 14-11 Based on Chapter 14 :
WACC and Modigiani & Miller Extension Models With Growth Assumptions Consider the entrepreneur described in Section 14.1 ( and referenced in Tables 14.1 – 14.3 ). Suppose she funds the project by borrowing $ 750 rather than $ 500 .
a . According to MM Proposition I , what is the value of the equity ? What are its cash flows if the economy is strong ? What are its cash flows if the economy is weak ?
b . What is the return of the equity in each case ? What is its expected return ?
c . What is the risk premium of equity in each case ? What is the sensitivity of the levered equity return to systematic risk ? How does its sensitivity compare to that of unlevered equity ? How does its risk premium compare to that of unlevered equity ?
d . What is the debt-equity ratio of the firm in this case ? e . What is the firm ’ s WACC in this case ? Problem 14-18 Based on Chapter 14 :