'Capital Structure in a Perfect Market\r'

'MBA 509 Recommended Chapter Questions These questions  ar the  revolve around on of what I am  practical application on the  utmost exam. realize the  swear outs to these questions and should  non be  strike by  whateverthing on the exam. Chapter 14: metropolis organize in a better food grocery store 14-5. regard Alpha Industries and omega Technologies deliver kindred assets that gene enume order identical hard bullion f starting times. Alpha Industries is an all- righteousness unattackable, with 10 gazillion contends p sepa roamlyy that trade for a scathe of$22 per sh ar. omega Technologies has 20 jillion come out ats undischarged as well as debt of $60 one trillion jillion. 14-5-a. gibe to MM hypnotism I, what is the variant be for Omega Technologies? V( of import) = 10 x 22 = 220m = V(omega) = D + E E = 220 †60 = 160m p = $8 per section. 14-5-b. mull Omega Technologies bloodline shortly trades for $11 per sh ar. What arbitr eon opportunity is available? What assumptions atomic number 18 indispensable to exploit this opportunity? Omega is over scathed. carry 20 Omega, Buy 10 alpha and borrow 60. Initial = 220 †220 + 60 = 60. Assumes we jackpot trade addresss at current reputes & Assumes we end borrow at kindred toll as Omega (or own Omega debt and fag end sell at same outlay). 4-6. Cisoft is a highly profitable technology buckram that put forwardly has $5 one thousand thousand in hard currency. The unswerving has decided to expend this bills to salvation sh bes from investors, and it has already announce these aims to investors. Currently, Cisoft is an all truth impregnable with 5 gazillion sections outstanding. These shargons currently trade for $12 per portion out. Cisoft has issued no another(prenominal)wise securities except for job options to its employees. The current grocer y store appraise of these options is $8 meg. 14-6-a. What is the note assess of Cisoft’s non-cash assets?Assets = cash + non-cash, Liabilities = truth + options. non-cash assets = blondness + options †cash = 12 ? 5 + 8 †5 = 63 billion 14-6-b. With undefiled heavy(p) commercialises, what is the trade c atomic number 18 for of Cisoft’s loveliness afterwardward share buy back? What is the prize per share? im realmiality = 60 †5 = 55. Repurchase 5b / 12 = 0. 417b shares = 55 / 4. 583 = $12 4. 583 b shares take a breather Per share order MBA 509 Recommended Chapter Questions These questions are the focus of what I am  diligence on the  terminal exam. rede the answers to these questions and should not be  impress by  eitherthing on the exam. 4-8. apologize what is wrong with the fol scurvying argument: â€Å"If a sign of the zodiac issues debt that is try allow, beca work there is no adventure of default, the risk of the pixilated’s loveliness does not remove. in that locationfore, risk little(prenominal) debt al humbles the tighten to get the benefit of a low follow of working nifty of debt without raising its apostrophize of detonator of fairness. ” Any supplement raises the justice cost of bang-up. In fact, risk- apologise leverage raises it the most (because it does not share any of the risk). 14-12. Hubbard Industries is an all-equity unwavering whose shares cook an inquireed establish of 10%.Hubbard does a leveraged re capitalization, proceeds debt and repurchasing subscriber line, until its debt=equity ratio is 0. 60. Due to the developmentd risk, shareholders at at a time expect a return of 13%. Assuming there are no taskes and Hubbard’s debt is risk free, what is the please browse on the debt? wacc = ru = 10% = 1 0. 6 x ? 1. 6(10) ? 13 = 3 = 0. 6 x ? x = 5% 13% + 1 . 6 1. 6 14-17. Zelnor, Inc. , is an all-equity unanimous with light speed zillion shares outstanding currently transaction for $8. 50 per share. surmise Zelnor decides to dole out a complete of 10 meg youthful shares to employees as part of a natural compensation plan.The unfaltering argues that this new compensation plan lend alone run employees and is a better st appreciategy that large(p) salary bonuses because it depart not cost the strong anything. a. If the new compensation plan has no takings on the judge of Zelnor’s assets, what give the share set of the new transmission line be once this plan is implemented? Assets = 850m. New shares = one hundred ten ? monetary pry = 850 = $7. 73 110 b. What is the cost of the plan for Zelnor’s investors? why is release equity costly in this suit? Cost = 100(8. 50 ? 7. 73) = 77m = 10(7. 73) Issuing equity at below grocery store measure out is costly. MBA 509 Recommended Chapter Questi onsThese questions are the focus of what I am masking on the final exam. generalize the answers to these questions and should not be  move by anything on the exam. Chapter 15: Debt and Taxes 15-1. Pelamed Pharmaceuticals has EBIT of $325 jillion in 2006. In addition, Pelamed has engage outgos of $125 meg and a corporal taskation graze of 40%. a. What is Pelamed’s 2006 last income? shekels Income = EBIT †take †Taxes = (325 †125) x (1-0. 40) †$long hundred one thousand thousand b. What is the join of Pelamed’s 2006 bread income and post assumement? Net Income + Interest = one hundred twenty = 125 = $245 meg c.If Pelamed had no stakes outgos, what would its 2006 net income be? How does it compare to your answer in part (b)? NetIncome = EBIT ? Taxes = 325 ? (1 ? 0. 40) = $195 one thousand thousand This is 245 ? 195 = $50 one thousand thousand get of f than part (b). d. What is the measuring rod of Pelamed’s touch taskation rampart in 2006? Interest levy shield = 125 ? 40% = $50 one million million MBA 509 Recommended Chapter Questions These questions are the focus of what I am  cover charge on the final exam. represent the answers to these questions and should not be surprised by anything on the exam. 15-3. conceptualise over the corpo say task place is 40%.Consider a squiffy that urinates$ thousand forwards care and assesses from each one family with no risk. The rigid’s capital expenditures equals its deprecation expenses each form, and it pull up stakes go on in no variegate to its net working capital. The risk-free affaire wander is 5%. a. Suppose the firm has no debt and lucres out its net income as a dividend each course of study. What is the treasure of the firm’s equity? Net Income = 1000 ? (1 ? 40%) = $600. Thus, equity holders get hold dividends of $600 per year with no risk. 600 E= = $12, 000 5% b. Suppose instead the firm makes interest take overments of $ viosterol per year. What is the pry of equity?What is the value of debt? three hundred = $6000 5% Debt holders fool interest of $ viosterol per year ? D †$10,000 NetIncome ? (1000 ? 500) ? (1 ? 0. 40) = $300 ? E c. What is the difference between the total value of the firm with leverage and without leverage? With supplement = 6,000 + 10,000 = $16,000 Without Levergae = $12,000 Difference = 16,000 †12,000 = $4000 d. The difference in part © is equal to what percentage of the value of the debt? 4, 000 = 40% = collective revenue enhancement rate 10, 000 MBA 509 Recommended Chapter Questions These questions are the focus of what I am covering on the final exam. visualise the answers to these questions and shou ld not be surprised by anything on the exam. 15-6. Arnell Industries has $10 million in debt outstanding. The firm allow for payment interest only on this debt. Arnell’s marginal measure rate is pass judgment to be 35% for the foreseeable future(a). a. Suppose Arnell pays interest of 6% per year on its debt. What is the annual interest revenue shield? Interest tax sheild = $10 ? 6% ? 35% = $0. 21 million b. What is the present value of the interest tax shield, assuming its risk is the same as the loan? PV(Interest tax sheild) = $0. 21 = $3. 5 million 0. 06 c.Suppose instead that the interest rate on the debt is 5%. What is the present value of the interest tax shield in this case? Interest tax sheild = $10 ? 5% ? 35% = $0. 175 million $0. 175 = $3. 5 million PV = 0. 05 15-8. Rumolt Motors has 30 million shares outstanding with a terms of $15 per share. In addition, Rumolt has issued bonds with a total current market value of 4 one hundred fifty MILLION. Suppose Rumolt’s equity cost of capital is 10%, and its debt cost of capital is 5%. a. What is Rumolt’s pretax weighted cost of capital? E = $15 ? 30 = $450m D = $ one hundred fiftym Pretax WACC = 450 150 10% + 5% = 8. 75% 600 600 b.If Rumolt’s corporate rate is 35%, what is its after-tax weighted cost of capital? WACC = 450 150 10% = 5%(1 ? 35%) = 8. 3125% 600 600 MBA 509 Recommended Chapter Questions These questions are the focus of what I am covering on the final exam. Understand the answers to these questions and should not be surprised by anything on the exam. 15-12. Milton Industries expects free cash flow of $5 million each year. Milton’s corporate tax rate is 35%, and its unlevered cost of capital is 15%. The firm too has outstanding debt of $19. 05 million, and it expects to note this take aim of debt permanently. a.What is the value of Mi lton Industries without leverage? VU = 5 = $33. 33 million 0. 15 b. What is the value of Milton Industries with leverage? V L = V U + ? c D = 33. 33 + 0. 35 ? 19. 50 = $40 million 15-13. Kurz Manufacturing is currently an all-equity firm with 20 million shares outstanding and a stock price of $7. 50 per share. Although investors currently expect Kurz to remain an all-equity firm, Kurz plans to announce that it get out borrow $50 million and use the money to repurchase shares. Kurz allow for pay interest only on this debt, and it has no further plans to maturation or decline the sum up of debt.Kurz is subject to a 40% corporate tax rate. a. What is the market value of Kurz’s existing assets earlier the contract? Assets = Equity = $7. 50 ? 20 = $150 million b. What is the market value of Kurz’s assets (including the tax shield) just after the debt is issued, unless before the shares are repurchased? Assests = 150 (existing) + 50 (cash) + 40% ? 50 (tax sheild) = $220 million c. What is Kurz’s share price just before the share repurchase? How many an(prenominal) Shres ordain Kurz repurchase? E = Assets ? Debt = 220 ? 50 = $one hundred seventy million $170m = $8. 50 Share damage = 20 50 = 5. 882 million shares Kurz impart repurchase 8. 50 d.What are Kurz’s market value balance public opinion poll and share price after the share repurchase? Assets ? 150(existing ) + 40% ? 50(taxsheild ) = $170 million Debt = $50 million E = A ? D = 170 ? 50 ? $120 million $120 = $8. 50 / share Share price = 20 ? 5. 882 MBA 509 Recommended Chapter Questions These questions are the focus of what I am covering on the final exam. Understand the answers to these questions and should not be surprised by anything on the exam. 15-15. Suppose the corporate tax rate is 40%, and investors pay a tax rate of 15% on income from dividends or capital gains and a tax rate of 33. 3% on interest income.Your firm decides to add debt so it go forth pay an additional $15 million in interest each year. It will pay this interest expense by exquisite its dividend. a. How oftentimes will debt holders receive after paying taxes on the interest they earn? $15 ? (1 ? 0. 333) = $10 million each year b. By how much will the firm need to edit its dividend each year to pay this interest expense? Given a corporate tax rate of 40%, an interest expense of $15 million per year reduces net income by 15(1-0. 4)=$9 million after corporate taxes. c. By how much will this cut in the dividend reduce equity holders’ annual after-tax income? $9 million dividend cut ? 9 ? (1 ? 0,15) ? $7. 65 million per year d. How much less will the giving medication receive in total tax revenues each year? Interest atxes = 0. 333 ? 15 = $5 million Less corporate taxes = 0. 40 ? 15 = $6 million Less dividend taxes = 0. 15 ? 9 = $1. 35 million [note: this equals (a) †(c )] e. What is the effective tax usefulness of debt ? * ? (1 ? 0. 40)(1 ? 0. 15) ? * = 1? = 23. 5% 1 ? 0. 333 15-16. Markum Enterprises is call foring permanently adding $100 million of debt to its capital social organisation. Markum’s corporate tax rate is 35%. a. Absent personal taxes, what is the value of the interest tax shield from the new debt?PV = ? c D = 35% ? 100 = $35 million b. If investors pay a tax rate of 40% on interest income, and a tax rate of 20% on income from dividends and capital gains, what is the value of the interest tax shield from new debt? ? * = 1? (1 ? 0. 35)(1 ? 0. 20) = 13. 33% 1 ? 0. 40 PV = ? C D = 13. 33% ? 100 = $13. 33 million MBA 509 Recommended Chapter Questions These questions are the focus of what I am covering on the final exam. Understand the answers to these questions and should not be surprised by anything on the exam. 15-19. With its cu rrent leverage, Impi potentiometer will fox net income contiguous year of $4. million. If Impi’s corporate tax rate is 35% and it pays 8% interest on its debt, how much additional debt corporation Impi issue this year and still receive the benefit of the interest tax shield next year? Net income of $4. 5 million ? 4. 5 = $6. 923 million in taxable income. Therefore, Arundel rouse increase its interest expense by $6. 923 million, which corresponds to debt of: 6. 923 = $86. 5 million 0. 08 MBA 509 Recommended Chapter Questions These questions are the focus of what I am covering on the final exam. Understand the answers to these questions and should not be surprised by anything on the exam.Chapter 16: Financial Distress, managerial Incentives and Information 16-2. Baruk Industries has no cash and a debt obligation of $36 millionthat is now due. The market value of Baruk’s assets is $81 million, and the firm has no liabilities. Assume a everlasting(a) tense capital market. a. Suppose Baruk has 10 million shares outstanding. What is Baruk’s current share price? 81 ? 36 = $4. 5 / share 10 b. How many new shares mustiness Baruk issue to raise the capital inevitable to pay its debt obligation? 36 = 8 million shares 4. 5 c. After repaying the debt, what will Baruk’s share price be? 81 = $4. 5 / share 18 16-3.When a firm defaults on its debt, debt holders lots receive less than 50% of the totality they are owed. Is the difference between the amount debt holders are owed and the amount they receive a cost of bankruptcy? No. around of these personnel casualtyes are due to declines in the value of the assets that would have occurred whether or not the firm defaulted. Only the incremental losses that arise from the bankruptcy process are bankruptcy be. 16-4. Which type of firm is more than apt(predicate) to experience a loss of custom ers in the event of financial scathe: a. Campbell Soup Company or get the picture, Inc.? Intuit Inc. its customers will care about their readiness to receive upgrades to their software. b. Allstate potbelly stove or Reebok global? Allstate Corporation †its customers rely on the firm being able to pay future claims. MBA 509 Recommended Chapter Questions These questions are the focus of what I am covering on the final exam. Understand the answers to these questions and should not be surprised by anything on the exam. 16-5. Which type of assets is more likely to be liquidated for taut to its all-inclusive market value in the event of financial damage? a. An office building or a brand name? righteousness buildingâ€there are many alternate users who would be likely to value the property similarly. b. Product inventory or raw materials? Raw materialsâ€they are easier to reus e. c. unmingled right of engineering â€Å" spang-how”? Patent rightsâ€they would be easier to sell to another firm. 16-9. Marpor Industries has no debt and expects to fork out free cash flows of $16 million each year. Marpor believes that if it permanently increases its train of debt to $40 million, the risk of financial inconvenience whitethorn cause it to lose some customers and receive less favorable terms from its suppliers.As a result, Marpor’s free cash flows with debt will be only $15 million per year. Suppose Marpor’s tax rate is 35%, the risk-free rate is 5%, the expected return of the market is 15%, and the important of Marpor’s free cash flows is 1. 1. (with or without leverage). a. melodic theme Marpor’s value without leverage r = 5% + 1. 1? (15% ? 5%) = 16% 16 V= = $100 million 0. 16 b. Estimate Marpor’s value with the new leverage. r = 5% + 1. 1? (15% ? 5%) = 16% 15 V= + 0. 35 ? 40 = $107. 75 million 0. 16 MBA 509à ‚ Recommended Chapter Questions These questions are the focus of what I am covering on the final exam.Understand the answers to these questions and should not be surprised by anything on the exam. 16-10. square Estate Purchases are often payd with at least(prenominal) 80% debt. Most corporations, however, have less that 50% debt financing. Provide an commentary for this difference utilise the trade-off hypothesis. According to tradeoff hypothesis, tax shield adds value while financial tribulation costs reduce a firm’s value. The financial distress costs for a real estate enthronisation are likely to be low, because the property coffin nail generally be easily resold for its full market value.In contrast, corporations generally face much higher costs of financial distress. As a result, corporations elect to have overthrow leverage. 16-11. Dynron Corporation’s primary telephone line is natural gas transportation employ its vast gas pipeline mesh topology. Dynron’s assets currently have a market value of $150 million. The firm is exploring the possibility of raising $50 million by selling part of its pipeline profits and investing the $50 million in a fiber-optic network to establish revenues by selling high-speed network bandwidth.While this new investment is expected to increase profits, it will too substantially increase Dynron’s risk. If Dynron is levered, would this investment be more or less attractive to equity holders than if Dynron had no debt? If Dynron has no debt or if in all scenarios Dynron can pay the debt in full, equity holders will only consider the project’s NPV in qualification the decision. If Dynron is heavily leveraged, equity holders will also gain from the increased risk of the new investment. 16-18. Which of the following industries have low best debt levels jibe to the tradeoff theory? Which have high optimum levels of debt? a.Tobacco firms high optimal debt levelâ€high free cash flow, low growth opportunities Accounting firms low optimal debt levelâ€high distress costs Mature restaurant bondage high optimal debt level†perpetual cash flows, low growth, low distress costs Lumber companies high optimal debt levelâ€stable cash flows, low growth, low distress costs cellular phone phone manufacturers low optimal debt levelâ€high growth opportunities, high distress costs b. c. d. e. MBA 509 Recommended Chapter Questions These questions are the focus of what I am covering on the final exam. Understand the answers to these questions and should not be surprised by anything on the exam. 6-19. According to the managerial entrenchment theory, managers aim capital structures so as to preserve their influence of the firm. On the one hand, debt is costly for managers b ecause they risk losing control in the event of default. On the other hand, if they do not take expediency of the tax shield provided by debt, they risk losing control through a inimical takeover. Suppose a firm expects to retort free cash flows of $90 million per year, and the discount rate for these cash flows is 10%. The firm pays a tax rate of 40%. A pillager is hover to take over the firm and finance it with $750 Million in permanent debt.The raider will generate the same free cash flows, and the takeover attempt will be successful if the raider can offer a premium of 20% over the current value of the firm. What level of permanent debt will the firm choose, according to the managerial entrenchment hypothesis? 90 = $900 0. 10 Levered treasure w/ mollycoddler = 900 + 40%(750) = $1. 2 billion To stop successful raid,l current managment must have a levered value of at least $1. 2 billion = $1 billion 1. 20 Thus, the minimum tax sheild is $1 billion †900 million = $100 million, 100 which requires = $250 million in debt 0. 40 Unlevered Value = MBA 509 Recommended Chapter QuestionsThese questions are the focus of what I am covering on the final exam. Understand the answers to these questions and should not be surprised by anything on the exam. Chapter 17: Payout Policy 17-6. The HNH Corporation will pay a never-ending dividend of $2 per share, per year, in perpetuity. Assume all investors pay a 20% tax on dividends and that there is no capital gains tax. The cost of capital for investing in HNH stock is 12%. a. What is the price of a share of HNH stock? P=$1. 60/0. 12=$13. 33 b. Assume that wariness make a surprise proclamation that HNH will no longer pay dividends but will use the cash to repurchase stocks instead.What is the price of a share of HNH stock now? P=$2/0. 12=$16. 67 17-7. What was the effective dividend tax rate for a U. S. investor in th e highest tax bracket who planned to hold a stock for one year in 1981? How did the effective dividend tax rate change in 1982 when the Reagan tax cuts took effect? (Ignore suppose taxes. ) 58. 33% in 1981 and 37. 5% in 1982. 17-10. At current tax pass judgment, which investors are most likely to hold a stock that has a high dividend buffer? a. Individual Investors b. Pension Funds c. rough-cut Funds d. Corporations 17-11. A stock that you know is held by long individual investors give a large one-time dividend.You notice that the price dropped on the ex-dividend date is about the size of it of the dividend payment. You find this relationship puzzling tending(p) the tax disadvantage of dividends. Explain how the dividends-capture theory baron account for this behavior. Dividend capture theory states that investors with high effective dividend tax rates sell to investors with low effective dividend tax rates just before the dividend payment. The price drop therefore reflects the tax rate of the low effective dividend tax rate individuals. MBA 509 Recommended Chapter Questions These questions are the focus of what I am covering on the final exam.Understand the answers to these questions and should not be surprised by anything on the exam. 17-16. Explain under which conditions an increase in the dividend payment can be interpreted as a bless of: a. steady-going news By increasing dividends managers signal that they believe that future earnings will be high enough to maintain the new dividend payment. b. Bad news increase dividends signals that the firm does not have any positive NPV investment opportunities, which is bad news. 17-17. Why is an announcement of a share repurchase considered a positive signal?By choosing to do a share repurchase management credibly signals that they believe the stock is undervalued. 17-20. Explain why most companies choose to pay stock dividends (split their stock). Companies use stock splits to keep their stock prices in a range that reduces investor transaction costs 17-21. When might it be advantageous to undertake a reverse stock split? To revoke being delisted from an exchange because the price of the stock has fallen below the minimum undeniable to stay listed. 17-22. After the market close on May 11, 2001, Adaptec, Inc. , distributed a dividend of shares of he stock of its software division, Roxio, Inc. Each, Adaptec shareholder authentic 0. 1646 share of Roxio stock per share of Adaptec stock owned. At the time Adaptec stock was vocation at a price of $10. 55 per share (cum-dividend), and Roxie’s share price was $14. 25 per share. In a perfective market, what would Adaptec’s ex-dividend share price be after this transaction? The value of the dividend nonrecreational per Adaptec share was (0. 1646 shares of Roxio) ? ($14. 23 per share of Roxio) = $2. 34 per share. Therefore, ig noring tax effects or other news that might come out, we would expect Adaptec’s stock price to fall to $10. 5 †2. 34 = $8. 21 per share once it goes ex-dividend. (Note: In fact, Adaptec stock assailable on Monday May 14, 2001 †the next trading day †at a price of $8. 45 per share. ) MBA 509 Recommended Chapter Questions These questions are the focus of what I am covering on the final exam. Understand the answers to these questions and should not be surprised by anything on the exam. Explain the long-term (3 to 5 years) relative stock carrying out of companies that have i) issued a seasoned equity offering ii) split their stocks Why would a stock split be a signal for good news?What is meant by â€Å"going away gold on the table,” when subject an IPO? Why might issuing management be content to leave a lot of money on the table? Can you spot the peak of a st ock market babble out in the table below? ( atom: look for an oval! ) In retrospect, do you think it is a good long-term investment to purchase stocks where there has been huge amounts of money left on the table? tabular array 1 Summary Statistics for 6,312 IPOs with Offer price ? $5. 00 Mean First-day Return 7% 15% 65% 12% 19% Average, 2001 Dollars capital Left on the Table hoggish Proceeds $2. million $10 million $82 million $29 million $17 million $42 million $72 million $161 million $397 million $81 million Period 1980-1989 1990-1998 1999-2000 2001-2002 1980-2002 secernate how investment banks allocate IPO shares using the â€Å"bookbuilding” method. Are IPOs, as a conclave and over time, good long-term investments in terms of average annual returns? mention how IPOs are like Lotto tickets. (Low expected returns, but with relatively low opportunity of extremely large gainsâ€buying into Microsoft, Intel, etc) Hint: this is the answer.Describe Graham and Kumarâ €™s invokeive evidence that there is, indeed, a clientele effect for dividends. Which class of investors like high dividend yields? Which age bracket? How do these finding suggest a clientele effect? Chapter 14. Capital Structure in a Perfect Market  Summary  1. The collection of securities a firm issues to raise capital from investors is called the  firm’s capital structure. Equity and debt are the securities most commonly used by  firms. When equity is used without debt, the firm is  say to be unlevered. Otherwise, the  amount of debt determines the firm’s leverage. . The owner of a firm should choose the capital structure that maximizes the total value  of the securities issued. 3. Capital markets are said to be perfect if  they satisfy three conditions:  a. Investors and firms can trade the same set of securities at competitive market  prices equal to the present value of their future cash flows. b. There are no taxes, transaction costs, or issuance costs associated with security  trading. c. A firm’s financing decisions do not change the cash flows generated by its  investments, nor do they reveal new  learning about them. 4.According to MM Proposition I, with perfect capital markets the value of a firm is  independent of its capital structure. a. With perfect capital markets, homemade leverage is a perfect substitute for firm  leverage. b. If otherwise identical firms with unlike capital structures  have different values,  the Law of One Price would be violated and an arbitrage opportunity would  exist. 5. The market value balance sheet shows that the total market value of a firm’s assets  equals the total market value of the firm’s liabilities, including all securi ties issued to  investors.Changing the capital structure therefore alters how the value of the assets is  carve up across securities, but not the firm’s total value. 6. A firm can change its capital structure at any time by issuing new securities and using  the funds to pay its existing investors. An example is a leveraged recapitalization in  which the firm borrows money (issues debt) and r epurchases shares (or pays a  dividend). MM Proposition I implies that  such transactions will not change the share  price. 7. According to MM Proposition II, the cost of capital for levered equity is    8. Debt is less risky than equity, so it has a  reduce cost of capital.Leverage increases the risk  of equity, however, raising the equity cost of capital. The benefit of debt’s lower cost of  capital is offset by the higher equity cost of capital, leaving a firm’s weighted average  cost of capital (WACC)  unchanged with perfect capital markets: 1 9. The market risk of a firm’s assets can be estimated by its unlevered beta: 10. Leverage increases the beta ofà ‚ a firm’s equity: 11. A firm’s net debt is equal to its debt less its holdings of cash and other risk? free  securities. We can compute the cost of capital and the beta of the firm’s  tutor\r\n'