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A company has:
* $6 million market value of equity
* $4 million market value of debt
* WACC of 11.04%
* Corporate income tax rate of 20%
According to Modigliani and Miller's theoryof capital structure with tax,what is the ungeared cost of equity?
Suggested Answer: A
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26 comments · newest first
RO
Royal
6 months ago
I’m not sure, but option C, 16.24% feels too high. What do you think?
ME
Meaghan
6 months ago
I feel like option A, 12.00% could be right. It aligns with the WACC.
OC
Ocie
6 months ago
I’m leaning towards option B, 10.16%. It seems reasonable with the tax impact.
AL
Alyce
6 months ago
I think the ungeared cost of equity is crucial for understanding risk.
EA
Earleen
6 months ago
Totally agree, B seems like the best choice!
RA
Rashad
7 months ago
Wait, how can the ungeared cost of equity be that low?
MY
Myong
7 months ago
I think it's option B, 10.16%.
EL
Elza
7 months ago
WACC is 11.04%, right?
JE
Jennie
7 months ago
The market value of equity is $6 million.
LE
Leonora
7 months ago
I'm going with B) 10.16%. Gotta love those Modigliani and Miller formulas, they always get me the right answer.
VA
Van
7 months ago
Haha, this question is a piece of cake! The answer is clearly B) 10.16%. Modigliani and Miller would be rolling in their graves if we got this wrong.
DE
Delbert
8 months ago
D) 12.54% seems more reasonable. The WACC is 11.04%, and the tax rate is 20%, so the ungeared cost of equity should be higher than that.
SI
Sina
8 months ago
I'm pretty sure the answer is C) 16.24%. The question mentions the market value of debt, so we need to account for the tax shield in the cost of equity calculation.
TR
Tresa
8 months ago
The correct answer is B) 10.16%. Modigliani and Miller's theory with tax shows that the ungeared cost of equity is lower than the WACC due to the tax shield.
BR
Brynn
9 months ago
I feel like I’ve seen a question like this before, and I think the ungeared cost of equity is calculated using the market values of equity and debt. I just hope I remember the right formula!
NA
Nakisha
9 months ago
If I remember correctly, the ungeared cost of equity should be higher than the WACC since it reflects the risk without the benefits of debt. I’m leaning towards option C, but I’m not confident.
SH
Shaun
9 months ago
I think we might need to use the WACC formula and rearrange it to isolate the ungeared cost of equity. I practiced a similar question last week, but I can't recall the exact steps.
OM
Omega
9 months ago
I remember that to find the ungeared cost of equity, we need to adjust for the tax shield on debt. But I'm not entirely sure how to apply the formula correctly.
MI
Mireya
9 months ago
This is a straightforward Modigliani-Miller question. I've practiced similar problems, so I'm confident I can work through this step-by-step and arrive at the correct answer.
DE
Dewitt
9 months ago
I'm a bit confused on how to approach this. I know Modigliani-Miller has something to do with capital structure and the impact of taxes, but I'm not sure I fully understand how to apply it in this case. I'll have to review my notes carefully.
GA
Galen
10 months ago
Alright, I've got this. The key is to use the Modigliani-Miller formula for the ungeared cost of equity. With the information provided, I should be able to plug in the values and solve for the answer.
GE
Georgeanna
10 months ago
Okay, let me think this through. We have the market value of equity, market value of debt, WACC, and tax rate. I believe I can use those to calculate the ungeared cost of equity, but I need to double-check the formula.
LA
Lakeesha
10 months ago
Hmm, this looks like a Modigliani-Miller question. I think I need to use the formula for the ungeared cost of equity, but I'm not totally sure how to apply it with the given information.
AJ
Aja
4 months ago
Don't forget the tax rate! It affects the cost of debt.
LA
Layla
4 months ago
Right! Then we can find the ungeared cost of equity using the formula.
AL
Aliza
6 months ago
I think we need to calculate the weighted average cost of capital first.