Modigliani Milller

Question 1

a. If Acort is unlevered, what is the current market value of its equity?

Answer 1

𝔼 𝐸𝑞𝑢𝑖𝑡𝑦 =
(0.75 × 48 + 0.25 × 18)/
1.10
0,75 und 0,25 Wahrscheinlichkeiten
1,1 = cost of capital

Question 2

b. Suppose instead that Acort has debt with a face value of $18 million due in one year.
According to MM, what is the value of Acort’s equity in this case?

Answer 2

𝐷 =18/
1.05 = RF
= 17.143

Eqiety = 36.82 – 17.143 = $19.677m

Question 3

c. What is the expected return of Acort’s equity without leverage? What is the expected return
of Acort’s equity with leverage?

Answer 3

Without leverage the expected return is equal the cost of capital ⇒ 𝑟 = 10%

With leverage:

0. 75 × 48 + 0.25 × 18 − 18
1. 677

Question 4

Assets

Answer 4

Assets = Cash + Non-cash

Question 5

Liabilities

Answer 5

Equity + Options

Question 6

Non-cash assets

Answer 6

= Equity + Options – Cash

Question 7

Explain what is wrong with the following argument: “If a firm issues debt that is risk free,
because there is no possibility of default, the risk of the firm’s equity does not change.
Therefore, risk-free debt allows the firm to get the benefit of a low cost of capital of debt without
raising its cost of capital of equity.”

Answer 7

Any leverage raises the equity cost of capital. In fact, risk-free leverage raises it the most,
because it does not share any of the risk

Question 8

In perfect capital markets, the total cost of capital do not change, when the capital structure
changes:

Answer 8

But the equity cost of capital change and can be calculated with the following equation

Question 9

equity cost of capital change a

Answer 9

𝑟𝐸 = 𝑟𝑈 +𝐷/E (rU-RD)

Question 10

𝑊𝐴𝐶𝐶

Answer 10

ru

Question 11

What is the beta of Yerba stock after this transaction?

Answer 11

𝛽𝑒 = 𝛽𝑢 (1+D/E)

Question 12

F𝑜𝑟𝑤𝑎𝑟𝑑 𝑃/E 𝑟𝑎𝑡𝑖𝑜

Answer 12

𝑠ℎ𝑎𝑟𝑒 𝑝𝑟𝑖𝑐𝑒/

𝐸𝑃S

Question 13

Net Income

Answer 13

EBIT – Interest – Taxes

Question 14

What is the total of Pelamed’s 2006 net income and interest payments?

Answer 14

Net Income + Interest

Question 15

If Pelamed had no interest expenses, what would its 2006 net income be?

Answer 15

Net income = EBIT – Tax

Taxes auf den ganzen Ebit

Question 16

nterest Tax Shield

Answer 16

Tax Rate × Interest Payments