Respuesta :
a firm has a market value of assets of $50,000. it borrows $10,000 at 5%. if the unlevered cost of equity is 15%, 17.5% is the firms cost of equity capital according to mm.
What is market value of assets?
Market capitalization is frequently used to refer to market value, which is the price an asset commands on the market. Because they depend on a variety of variables, including the physical working environment, the overall state of the economy, and the dynamics of supply and demand, market values are dynamic in nature.
The price at which an asset is currently being sold on the market is its market value. In contrast, book value is the amount shown for an item on the company's balance sheet; nevertheless, certain assets are included on the balance sheet at their market value.
Given that,
Market value of assets = $50,000
Debt = $10,000
Cost of debt = 5%
Unlevered cost of equity = 15%
Equity = Market value of assets - Debt
Equity = $50,000 - $10,000
Equity = $40,000
Now,
Cost of equity capital
= Unlevered cost of equity + [(Debt/equity) x (Unlevered cost of equity - Cost of debt)]
= 15% + [($10,000 / $40,000) x (15% - 5%)]
= 15% + [0.25 x 10%]
= 15% + 2.5%
= 17.5%
So, firm's cost of equity capital is 17.5%. [
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