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  1. Company JJ gives you the following information for its operation. The expected profit (before tax) is $60 millions next year. Suppose there is a 35% corporate income tax imposed on the company. Company JJ has no debt originally. There are 8 million shares of common stocks outstanding. Let the current market price for the stock be $25 per share. Suppose that there is no expansion plan for the company to either spend on working capital vs. long-term investment or to apply the accumulated retained earning. Answer the following questions:
  2. a) Suppose that Company JJ also has issued some 5-year coupon bonds recently. The bond carries 6% coupon with $1,000 par value. Let the current bond price be $700 per bond, what is the yield to maturity for this bond? What are the assumptions you make here? Is there any limitation for this model?
  3. b) Let Company JJ’s total debts on coupon bond be $70 millions. How much will be the value of stockholders’ equities under Modigliani and Miller’s proposition?
  4. c) What is the cost of equity for Company JJ, if there’s no preferred stock issued for this company?
  5. d) What is the weighted average cost of capital after Company JJ has debts?
  6. e) Will the application of debts increase the “beta” of Company JJ’s common stock? Why or why not? (Note: You don’t need to calculate it. Just explain the reasons).


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