Your firm has debt worth $200,000, with a yield of 9 percent, and equity worth $300,000. It is growing at a 5 percent rate, and faces a 40 percent tax rate. A similar firm with no debt has a cost of equity of 12 percent. Under the MM extension with growth, what is its cost of equity?

VTS = rdTD/(rsU – g) = 0.09(200,000)(0.40)/(0.12-0.05)
= 102,857

Refer to Trumbull, Inc. What is the value of Trumbull's equity if it is viewed as an option?
Trumbull, Inc.
Trumbull, Inc., has total value (debt plus equity) of $5 million and $2 million face value of 1-year zero coupon debt. The volatility (?) of Trumbull's total value is 0.60, and the risk free rate is 5 percent. Assume that N(d1) = 0.9720 and N(d2) = 0.9050

V = PN(d1) – Xe-rf(T)N(d2) = 5.0(0.9720) – 2.0e-0.05(1)(0.9050) = 3.138 million

Refer to Gomez Computer Systems. According to the MM extension with growth, what is the value of Gomez's tax shield?
Gomez Computer Systems
Gomez Computer Systems has EBIT of $200,000, a growth rate of 6 percent, and faces a tax rate of 40 percent. In order to support growth, Gomez must reinvest 20 percent of its EBIT in net operating assets. Gomez has $300,000 in 8 percent debt outstanding, and a similar company with no debt has a cost of equity of 11 percent.

VTS = rdTD/(rsU – g) = 0.08(0.40)(300,000)/(0.11 – 0.06) =