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Part 1

15.2

a) ½

b) 0.16

c) 0.16

15.9

a) False.
o Only a change in capital structure
o No effect on market value  MM Proposition 1)
o Stock price remains constant

b) False.
o MM Proposition 2:
A higher debt to equity ratio increases firm's cost of equity. However, firm's cost of capital remains unchanged.
o rs = r0 + (r0 – rB)B/S
 Cost of equity is positively related to firm's debt to equity ratio

15.16

a) $7,375,000

b) 33.90%

c) It depends.
In reality, there is likelihood of financial distress and bankruptcy costs which will increase the cost of debt. Moreover, the percentage of debt use by firms differs by the nature of the industry the firm is in. Thus, without additional information, it is hard to determine whether the amount of debt reflects reality.

15.19

a) 36.25%

b) 19.98%

c) 16.98%, 15.78%

16.13

a) $15,000

b) 1. $15,000

2. $7,500

3. 0.30

4. 0.2

c) 1. It depends.
The......

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Approximate Word Count: 711
Approximate Pages: 3 (250 words per double-spaced page)

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