Corporate Finance on-line CFA test - Audrey Yatchs

[sharky7]

Below the question and answer from the Institute. My questions are:
How do we know if we have to use Modigliani formulas or we can directly calculate the WACC with the standard formula?
Shouldn’t them lead to the same result?
Quite lost here.
Thanks!
*******
[question removed by admin]

 

[nsbharath]

“costs of financial distress, agency costs, or asymmetrical information” in a dead give away to use MM theorem. If I remember, the company is a zero debt company, which is again a good indicator to use MM theory. Out of all the curriculum MM is the only place which discusses about r0 (meaning cost of equity when there is zero debt).

 

[sharky7]

Silly me, I didn’t realize that I have to calculate the 25% levered Ke.
Burnout consequences….