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### Ch09 P18 Build a Model

Course: ACCOUNTING 1102, Spring 2011
School: InterAmerican Recinto...
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09. 4/16/2010 Chapter Ch09 P18 Build a Model INPUTS USED IN THE MODEL P0 \$50.00 Net Ppf \$30.00 Dpf \$3.30 D0 \$2.10 7% g B-T rd 10% 0.83 Skye's beta Market risk premium, RPM 6.0% Risk free rate, rRF 6.5% 45% 5% 50% 35% 10% Target capital structure from debt Target capital structure from preferred stock Target capital structure from common stock Tax rate Flotation cost for common a. Calculate the cost...

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09. 4/16/2010 Chapter Ch09 P18 Build a Model INPUTS USED IN THE MODEL P0 \$50.00 Net Ppf \$30.00 Dpf \$3.30 D0 \$2.10 7% g B-T rd 10% 0.83 Skye's beta Market risk premium, RPM 6.0% Risk free rate, rRF 6.5% 45% 5% 50% 35% 10% Target capital structure from debt Target capital structure from preferred stock Target capital structure from common stock Tax rate Flotation cost for common a. Calculate the cost of each capital component, that is, the after-tax cost of debt, the cost of preferred stock (including flotation costs), and the cost of equity (ignoring flotation costs). Use both the DCF method and the CAPM method to find the cost of equity. Cost of debt: B-T rd (1 T) A-T rd = Cost of preferred stock (including flotation costs): Dpf / Net Ppf = rpf Cost of common equity, DCF (ignoring flotation costs): D1 / P0 + g = rs Cost of common equity, CAPM: rRF b RPM + rs = = IMPORTANT NOTE: HERE THE CAPM AND THE DCF METHODS PRODUCE APPROXIMATELY THE SAME COST OF EQUITY. THAT OCCURRED BECAUSE WE USED A BETA IN THE PROBLEM THAT FORCED THE SAME RESULT. ORDINARILY, THE TWO METHODS WILL PRODUCE SOMEWHAT DIFFERENT RESULTS. b. Calculate the cost of new stock using the DCF model. D0 (1 + g) / P0 (1 F) + g = re c. What is the cost of new common stock based on the CAPM? (Hint: Find the difference between r e and rs as determined by the DCF method and add that differential the to CAPM value for r s.) rs + + Differential = = re Again, we would not normally find that the CAPM and DCF methods yield identical results. d. Assuming that Gao will not issue new equity and will continue to use the same capital structure, what is the company's WACC? wd 45.0% wpf 5.0% ws 50.0% 100.0% wd A-T rd + wpf rpf + ws rs = = WACC e. Suppose Gao is evaluating three projects with the following characteristics: (1) Each project has a cost of \$1 million. They will all be financed using the target mix of long-term debt, preferred stock, and common equity. The cost of the common equity for each project should be based on the beta estimated for the project. All equity will come from reinvested earnings. (2) Equity invested in Project A would have a beta of 0.5 and an expected return of 9.0%. (3) Equity invested in Project B would have a beta of 1.0 and an expected return of 10.0%. (4) Equity invested in Project C would have a beta of 2.0 and an expected return of 11.0%. Analyze the companys situation and explain why each project should be accepted or rejected. Project A Project B Project C Beta 0.5 1.0 2.0 rs rps rd(1 T) WACC Expected return on project The expected returns on Projects A and B both exceed their risk-adjusted WACCs, so they should be accepted. However, Project C's WACC exceeds its expected rate of return, so it should be rejected.
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InterAmerican Recinto Metropolitano - ACCOUNTING - 1102
4/16/2010Chapter 10. Chapter 10 P23 Build a ModelGardial Fisheries is considering two mutually exclusive investments. The projects' expected net cash flows are asfollows:Time01234567Expected Net Cash FlowsProject A Project B(\$375)(\$575)(\$
InterAmerican Recinto Metropolitano - ACCOUNTING - 1102
4/16/2010Chapter 11. Ch 11-18 Build a ModelWebmasters.com has developed a powerful new server that would be used for corporations Internet activities. It wouldcost \$10 million at Year 0 to buy the equipment necessary to manufacture the server. The proj
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Chapter 12. Ch 12-10 Build a ModelZieber Corporation's 2010 financial statements are shown below. Forecast Zeiber's 2011 income statement andbalance sheets. Use the following assumptions: (1) Sales grow by 6%. (2) The ratios of expenses to sales,deprec
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11/22/10Ch 12-11 Build a ModelFigure 1. Financial Statements and Other Data (Millions except per share data)Balance Sheet, Matthews, 12/31/10Cash and securitiesAccounts receivableInventoriesTotal current assetsNet fixed assetsTotal assets\$1201,
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4/16/2010Chapter 13. Ch 13-11 Build a ModelThe Henley Corporation is a privately held company specializing in lawn care products and services. The most recentfinancial statements are shown below.Income Statement for the Year Ending December 31 (Millio
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4/16/2010Chapter 14. Ch 14-12 Build a ModelBuena Terra Corporation is reviewing its capital budget for the upcoming year. It has paid a \$3.00 dividendper share (DPS) for the past several years, and its shareholders expect the dividend to remain constan
InterAmerican Recinto Metropolitano - ACCOUNTING - 1102
4/16/2010Chapter 14. Ch 14-13 Build a ModelJ. Clark Inc. (JCI), a manufacturer and distributer of sports equipment, has grown until it has become a stable, mature company.Now JCI is planning its first distribution to shareholders. Shown below are the m
InterAmerican Recinto Metropolitano - ACCOUNTING - 1102
4/16/2010Chapter 15. Ch 15-12 Build a ModelReacher Technology has consulted with investment bankers and determined the interest rate it would payfor different capital structures, as shown below. Data for the risk-free rate, the market risk premium, an
InterAmerican Recinto Metropolitano - ACCOUNTING - 1102
4/16/2010Chapter 16. Ch16 P18 Build a ModelInput DataCollections during month of saleCollections during month after saleCollections during second month after saleLease paymentsTarget cash balanceGeneral and administrative salariesDepreciation cha
InterAmerican Recinto Metropolitano - ACCOUNTING - 1102
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InterAmerican Recinto Metropolitano - ACCOUNTING - 1102
A1234567891011121314151617181920212223242526272829303132333435363738394041424344454647484950515253545556575859606162636465666768697071727374757677787980818283848586878
InterAmerican Recinto Metropolitano - ACCOUNTING - 1102
A123456789101112131415161718192021222324252627BCDEFGHI4/19/2010Chapter 19. Ch 19-08 Build a ModelMaggie's Magazines (MM) has straight nonconvertible bond that currently yield 9%. MM's stock sells for \$22 per share,ha
InterAmerican Recinto Metropolitano - ACCOUNTING - 1102
A12345678910111213141516171819202122232425262728293031323334BCDEFGHChapter 20. Ch 20-06 Build a ModelNote: Fill in the shaded cells with the appropriate formulaSchumann Shoe Manufacturer is considering whether o
InterAmerican Recinto Metropolitano - ACCOUNTING - 1102
A123456789101112131415161718192021222324252627282930313233343536373839404142434445464748495051525354555657585960616263646566676869707172737475767778798081828384858687B
InterAmerican Recinto Metropolitano - ACCOUNTING - 1102
4/19/2010Chapter 22. Ch 22-5 Build a ModelDuchon Industries had the following balance sheet at the time it defaulted on its interest payments and filed forliquidation under Chapter 7. Sale of the fixed assets, which were pledged as collateral to the mo
InterAmerican Recinto Metropolitano - ACCOUNTING - 1102
4/19/2010Chapter 22. Ch 22-5 Build a ModelDuchon Industries had the following balance sheet at the time it defaulted on its interest payments and filed forliquidation under Chapter 7. Sale of the fixed assets, which were pledged as collateral to the mo
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2f1b6223a82231c296b812bd78dbefa8609f8617.xlsxMichael C. EhrhardtBuild a Model4/19/2010Chapter 23. Ch 23-06 Build a ModelProblem 23-6. Use the information and data from Problem 23-5Problem Inputs:Size of planned debt offering =Anticipated rate on d
InterAmerican Recinto Metropolitano - ACCOUNTING - 1102
4/19/2010Chapter 24. Ch 24 P09 Build a ModelFollowing is information for the required returns and standard deviations of returns for A, B, and C.
InterAmerican Recinto Metropolitano - ACCOUNTING - 1102
4/19/2010Chapter 25. Ch 25-9 Build a ModelBradford Services Inc. (BSI) is considering a project that has a cost of \$10 million and an expected life of 3 years.There is a 30 percent probability of good conditions, in which case the project will provide
InterAmerican Recinto Metropolitano - ACCOUNTING - 1102
4/19/2010Chapter 26. Ch 26 P11 Build a ModelA. Fethe is a custom manufacturer of guitars, mandolins and other stringed instruments locatednear Knoxville, TN. Fethe's current value of operations, which is also its value of debt plus equity,is estimated
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A12345678910111213141516171819202122232425262728293031323334353637383940BCDEFGHI4/19/2010Chapter 27. Ch 27-12 Build a ModelMalone Feed and Supply Company buys on terms of 1/10, net 30, but it has not been
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