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You expect your firm to be worth $50, $100, or $120 with probabilities 1/10, 6/10 and 3/10, respectively. You can raise $75 in debt proceeds today if you promise an interest rate of 10%. If this is how you finance your firm, then your cost of equity capital is 20%

What would be the debt-to-capital ratio of this firm (in the $50-debt financing scenario)?

What would be the cost-of-equity-capital for this firm (in the $50-debt financing scenario)?

Is the $75 debt-financing scenario cost-of-debt capital higher, or is the $50 debt-financing scenario cost-of debt capital higher? What does this mean for the relative risk of the two types of debt?

Is the $75 debt-financing scenario cost-of-equity capital higher, or is the $50 debt-financing scenario cost of-equity capital higher? What does this mean for the relative risk of the two types of equity?

Is the $75 debt-financing scenario cost-of-firm capital higher, or is the $50 debt-financing scenario cost-of- firm capital higher?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M93060238

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