Is the firms debt risky?

Consider a firm that currently has no debt. The risk free rate is 3% the market risk premium is 6% Show more Consider a firm that currently has no debt. The risk free rate is 3% the market risk premium is 6% and the firm carries a beta of 2. Assume no taxes or transaction costs and perfect capital markets (i.e. Modigliani-Miller). WACC = 0.15 (unlevered) If the firm currently has a valuation of $10 million what is the market value of debt and equity if the firm issues 1-year zero coupon riskless debt with face value of $4.12 million and uses the proceeds to repurchase stock? Market Value Equity = $6.0M Market Value Debt = $4.0M The new Beta is 3.33 Assume that the firms debt issue raises only $3.9 million. What is the cost of debt and cost of equity?

Consider a firm that currently has no debt. The risk free rate is 3% the market risk premium is 6% Show more Consider a firm that currently has no debt. The risk free rate is 3% the market risk premium is 6% and the firm carries a beta of 2. Assume no taxes or transaction costs and perfect capital markets (i.e. Modigliani-Miller). WACC = 0.15 (unlevered) If the firm currently has a valuation of $10 million what is the market value of debt and equity if the firm issues 1-year zero coupon riskless debt with face value of $4.12 million and uses the proceeds to repurchase stock? Market Value Equity = $6.0M Market Value Debt = $4.0M The new Beta is 3.33 Assume that the firms debt issue raises only $3.9 million. What is the cost of debt and cost of equity? Is the firms debt risky? ANSWER STEP BY STEP IN YOUR OWN WORDS Show less

ANSWER STEP BY STEP IN YOUR OWN WORDS Show less

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