Delta Mills and Franklin Mill Are Identical Firms Except for Their

question 26

Multiple Choice

Delta Mills and Franklin Mill are identical firms except for their capital structures.Delta is an unlevered firm with $750,000 in stock.Franklin is a levered firm with $375,000 of stock and an interest rate on debt of 8 percent.Both Delta and Franklin have an expected EBIT of $90,000.Ignore taxes.Delta has a WACC of _____ percent and Franklin's WACC is _____ percent.

• A)12;16
• B)12;14
• C)12;12
• D)14;12
• E)16;16

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Definitions:

Perfect Competitors

In a perfectly competitive market, firms that have no market power and cannot set prices, with many buyers and sellers trading identical products.

Non-price Competition

A marketing strategy where a company tries to distinguish its product or service from competing products based on attributes other than price.

Herfindahl-Hirschman Index

A measure of market concentration used to determine the competitiveness of a market. It sums the squares of the market shares of all firms in the industry.

Industry

A group of companies that produce similar products or services, often characterized by shared markets, competition, and regulations.