Larry Trint 50% for debt, 50% for equity firm has a market value of assets of $5
ID: 2756591 • Letter: L
Question
Larry Trint 50% for debt, 50% for equity firm has a market value of assets of $50,000. It borrows $10,000 at 3%. If the unlevered cost of equity is 15%, what is the firm's cost of equity capital according to MM? Select one: O a, 16% O b, 17% ° C. 18% O d, 1996 A company issues a callable (at par) ten-year, 6% coupon bond with annual coupon payments. The bond can be called at p in one year after release or any time after that on a coupon payment date On release, it has a price of $1,040 per $1,000 o face value. What is the yield to worst of this bond when it is released? Select one the YTC, which is 547% b, the YTM, which is 5.47%Explanation / Answer
Market Value of Assets = $ 50,000
Loan taken = $ 10,000 at 3%
Balance Portion (Equity) = $ 40,000 @ 15% (Unilevered Portion)
As per the Modiglani Miller Concept, Cost of Unilevered Equity should be equal to the total cost of Debt-Equity
In this problem, the total cost of debt-equity is equal to 3% + 15% = 18%
Hence, the firm's cost of equity capital will also be equal to 18%. Hence, option c is the correct option.
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