Part 7 (ch14) Questions Numeric
Last updated: 07/05/2025
Type your answers with “.” instead of “,”! For numerical answers, use 2 decimal places. For instance, if your answer is 0.12345 or 12.345%, type, “12.34” in the box.
Q1
Q: Company X has no debt. Its assets will be worth 599.7 million in one year if the economy is strong, but only 299.5 million if the economy is weak. Both events are equally likely. The market value today of X’s assets is 402.8 million. What is the expected return without leverage (in %)?
Answer: 11.62 %
Q2
Q: Company Y has 50 million shares outstanding and a market capitalization of 3 billion. It also has 757 million in debt outstanding. The company has decided to delever the firm by issuing new equity and completely repaying all the outstanding debt. Assume perfect capital markets. How many new shares must the company issue (in millions)?
Answer: 12.62 million shares
Q2
Q: Consider two firms, Leverage and NonLeverage, that have identical assets generating identical cash flows. NonLeverage is an all-equity firm, with 1.58 million shares outstanding that trade at 24.54 per share. Leverage has 2 million shares outstanding and 8 million in debt, with an interest rate of 5%.
According to Modigliani–Miller Proposition I (with no taxes), what is the stock price for Leverage (in $)?
Answer: 15.39