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Modigliani & Miller - Cost of Equity

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Your firm has debt of $200,000, with a yield of 9 percent, and equity worth $300,000. It is growing at a 5 percent rate. Its tax rate is 40%.

A similar firm with no debt has a cost of equity of 12 percent.

Under the MM extension with growth, what is its cost of equity?

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Solution Summary

This solution calculates the cost of equity under an MM extension with growth.

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rs=Cost of equity of Levered firm =???
ro=Cost of equity of unlevered firm =12%
rb=Cost of Debt =9%
B=Amount of Debt=200000
S=Amount of Equity=300000
g=Growth Rate=5%
VL=Value of Levered firm =200000+300000=500000
VU= Value of unlevered ...

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