According to Modigliani and Miller (M&M),in a World of Perfect

question 40

Essay

According to Modigliani and Miller (M&M),in a world of perfect capital markets,except that interest on debt is tax deductible,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,a tax rate of 30%,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?