3.Johnson Company is financed by a mixture of debt and equity. You have the following...
90.2K
Verified Solution
Link Copied!
Question
Accounting
3.Johnson Company is financed by a mixture of debt and equity. You have the following information about its cost of capital: rD= 12%, rf= 10%, rm= 18%, E= 1.5, D/V= 0.5. We apply MMs assumptions and no taxes.
(1)Compute rE by CAPM (or SML). 22%
(2)Compute D by CAPM (or SML) because theoretically every security should locates on SML. 0.25
(3)Compute rA by WACC. 17%
(4)Compute A as the weighted average of D and E. 0.875
4.Continue from the previous question. Suppose now that Johnson Company repurchases debt and issues equity so that D/V= 0.3. The reduced borrowing causes rD to fall to 11%. What is rA and A now? Compute rE, D, and E again. [Hint: Do not follow the order in the previous question. Follow the concept from the MMs Proposition II. Fix rA first, then compute rE by the MMs Proposition II. Use CAPM (or SML) to compute s by new required returns solved in this question.]
Pls help me to solve the question 4, show your work. Thanks.
Answer & Explanation
Solved by verified expert
Get Answers to Unlimited Questions
Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!
Membership Benefits:
Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!
