Consider a firm in a two period (time 1 and time 2) setting with the following distribution of values at time 2:
|
State |
Probability |
Values (t =2) |
|
1 |
0.5 |
$3,600 |
|
2 |
0.5 |
$1,600 |
Suppose the corporate tax rate is 50%. If the firm becomes insolvent at time 2, the costs incurred would be $200, which is deducted from the firm”s value. Suppose further that time 0 prices of (unit) contingent claims for the two states of the world are each 0.45.
- . What is the firm”s weighted average cost of capital if the firm”s capital is 100% equity financed?
- If there is $600 worth of debt-bearing interest rate of 10% in the firm”s capital, what is the firm”s weighted average cost of capital?
- If there is $1,000 worth of debt-bearing interest rate of 10% in the firm”s capital, what is the firm”s weighted average cost of capital?