Wolfrum Technology Unlevered Firm
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4. Wolfrum Technology has no debt. Its assets will be worth 450 million in one year if the economy is strong, but only $200 million in one year if the economy is weak. Both events are equally likely. The market value today of its assets is $250 million.
a. What is the expected return of WT stock without leverage?
b. Suppose the risk-free interest rate is 5%. If WT borrows $100 million today at this rate and uses proceeds to pay an immediate cash dividend, what will be the market value of its equity just after the dividend is paid according to MM?
c. What is the expected return of MM stock after the dividend is paid in part (b)?
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Solution Summary
The solution is presented in an excel sheet as well as in a word document format. The problem addresses the following concepts:
1) Calculation of Expected Returns
2) Calculation of the Market Value of Equity
3) Calculation of Expected Returns after the payment of dividends
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Please check the attached file for better formatted solutions
a) = (0.5 × $450) ...
Education
- BA, Ain Shams University, Cairo Egypt
- MBA, California State University, Sacramento
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