Dynamo Corp

question 76

Multiple Choice

Dynamo Corp. produces annual cash flows of $150 and is expected to exist forever. The company is currently financed with 75 percent equity and 25 percent debt. Your analysis tells you that the appropriate discount rates are 10 percent for the cash flows, and 7 percent for the debt. You currently own 10 percent of the stock. If Dynamo wishes to change its capital structure from 75 percent to 60 percent equity, what transaction do you need to take in order to undo the restructuring according to M&M Proposition 1?

• A) Sell $22.50 of stock
• B) Sell $10.80 worth of stock
• C) Buy $22.50 worth of debt
• D) Buy $10.80 worth of debt

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Definitions:

Mentoring

Mentoring is a personal developmental relationship where a more experienced or knowledgeable person helps to guide a less experienced or less knowledgeable person.

Stand-Alone Method

A technique or intervention that is used independently rather than in combination with other methods.

Performance Aids

Tools or resources provided to employees to support the immediate application of skills or knowledge, enhancing performance efficiency and effectiveness.

Pre-Flight Checks

A series of inspections and verifications performed before an aircraft is cleared for takeoff, ensuring safety and operational readiness.