HW Ch 16 Instructions: You provide the answer. There is only one correct answer. When the question requires answers of percentage values, express your answers in strictly numerical terms. For example, if the answer is 5%, write 0.05 or if your answer is one thousand dollars, write: 1000.

Round your answers to the third decimal space.

1) Suppose you borrow $450500 when financing a coffee shop which is valued at $1067500. You expect to generate a cash flow of $1150000 at the end of the year. The cost of debt is 5%. What should the value of the equity be?

2) Suppose you borrow $450500 when financing a coffee shop which is valued at $1067500. You expect to generate a cash flow of $1150000 at the end of the year. The cost of debt is 5%. What is the cost of equity?

3) Suppose you borrow $35000 when financing a coffee shop which is valued at $99000. Assume that the unlevered cost of capital for the coffee shop is 6.5% and that the cost of debt is valued at 3%. What should be the cost of equity of your firm?

4) ECB borrows $1100000 USDs by issuing 5-year bonds. ECB's cost of debt is 3.5%, so it will need to pay $38500 USDs in interest each year for the next 5 years, and then repay the principal $1100000 USD in year 5. ECB's marginal tax rate will remain 35 throughout this period. By how much (in USDs) does the interest tax shield increase the value of ECB?

5) Axon Industries needs to raise $2700000 USDs for a new investment project. If the firm issues 1-year debt, it may have to pay an interest rate of 9%, although Axon's managers believe that 7% would be a fair rate given the level of risk. If the firm issues equity, they believe the equity may be underpriced by 4%.What is the cost (in USDs) to current shareholders of financing the project out of retained earnings?

6) Axon Industries needs to raise $2700000 USDs for a new investment project. If the firm issues 1-year debt, it may have to pay an interest rate of 9%, although Axon's managers believe that 7% would be a fair rate given the level of risk. If the firm issues equity, they believe the equity may be underpriced by 4%. What is the cost (in USDs) to current shareholders of financing the project out of debt?

7) Axon Industries needs to raise $2700000 USDs for a new investment project. If the firm issues 1-year debt, it may have to pay an interest rate of 9%, although Axon's managers believe that 7% would be a fair rate given the level of risk. If the firm issues equity, they believe the equity may be underpriced by 4%. What is the cost (in USDs) to current shareholders of financing the project out of equity?

HW Ch 16 Instructions: You provide the answer. There is only one co...