MGFB10H3 Study Guide - Risk-Free Interest Rate, Risk Premium, Capital Structure
Document Summary
Allequity limited (ae) and somedebt inc (sd) are identical firms in all respects except for their capital structure. Allequity is all equity financed with ,000,000 in stock. Its stock is worth ,000,000 and the interest rate on its debt is. Ignore taxes: jessica moneysmart owns ,000 worth of somedebt"s stock. Fonex enterprises (fon) has three divisions rog communications (rog), lob supermarkets (lob), and rouge canyons restaurants (rc). Data on the firm and the divisions are as follows: Assume debt is perpetual; coupon rate is 8% and is trading at 125% of the face value. Risk free rate of return is 3% and the market risk premium is 7%. Jobsjobsjobs limited (jjj) has debt/equity ratio of 50%, borrows at 5% interest rate, and is in the 40% tax bracket. Its shareholders require an 11. 5% rate of return. Jjj is considering building a new manufacturing plant in thunder bay. ,000,000 and will provide ebit of ,000,000 per year for 18 years.
