Figure 111: Selected Information for Silicon Solutions Inc -According to Modigliani and Miller (M&M),in a World of Perfect

question 60

Essay

Figure 11.1: Selected information for Silicon Solutions Inc.
$\begin{array}{|l|l|l} \hline& \text { ALL EQUITY } & \text { EQUTTY AND DEBT } \\ \hline & & \\\hline \text { Number of shares } & 1,000,000 & 750,000 \\\hline \text { Price per share } & \$ 10 & \$ 10 \\\hline \text { Market value of shares } & \$ 10,000,000 & \$ 7,500,000 \\\hline \text { Market value of debt } & - & \$ 2,500,000 \\\hline & & \\\hline \text { Anticipated operating income } & \$ 1,000,000 & \$ 1,000,000 \\\hline \text { Interest } & - & \$ 150,000 \\\hline \text { Earnings (after interest) } & \$ 1,000,000 & \$ 850,000 \\\hline \text { Earnings per share } & \$ 1.00 & \$ 1.13 \\\hline \text { Return on shares } & & \\\text { Average cost of capital } & & \\\text { Return on debt } & & \\\hline\end{array}$
-According to Modigliani and Miller (M&M),in a world of perfect capital markets,what will be the expected equity return (or cost of equity)for a firm that has a cost of capital of 14 percent,a cost of debt of 8 percent,debt valued at $3.0 million,and equity valued at $4.0 million? What would happen to the cost of equity as the amount of debt increased? What would happen to the cost of debt if the amount of debt was increased?

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Definitions:

Undivided Interest

Refers to a co-owner's share in a property, where each owner has rights to the entire property rather than a specific subdivided portion.

UPA

Stands for Uniform Partnership Act, a law in the United States that governs the operations of partnerships within the states that adopt it.

Tenant in Partnership

A type of ownership in which partners in a business venture own property together, with each partner having an equal right to the property's use and no right of survivorship.

Maladaptive Behavior

Actions or tendencies that hinder an individual’s ability to adjust to particular situations, often leading to negative outcomes or mental health issues.