10-3 V
ps
= $50; D
ps
= $4.50; F = 0%; r
ps
= ?
r
ps
=
D
ps
/ (
V
ps
) (1 -
F
)
= ($4.5) / $50 (1 - 0)
= 9%
10-7 30% Debt; 5% Preferred Stock; 65% Equity; r
d
= 6%; T = 40%; r
ps
= 5.8%; r
s
= 12%.
WACC = (w
d
)(r
d
)(1 - T) + (w
ps
)(r
ps
) + (w
ce
)(r
s
)
WACC = 0.30(0.06)(1-0.40) + 0.05(0.058) + 0.65(0.12) = 9.17%.
10-15 a. Common equity needed:
0.5($30,000,000) = $15,000,000.
b. Cost using r
s
:
After-Tax
Percent
× Cost
= Product
Debt 0.50 4.8%* 2.4%
Common equity 0.50 12.0 6.0
WACC = 8.4%
*8%(1 - T) = 8%(0.6) = 4.8%.
c. r
s
and the WACC will increase due to the flotation costs of new equity.
10-16 The book and market value of the current liabilities are both $10,000,000.
The bonds have a value of
V = $60(PVIFA
10%,20
) + $1,000(PVIF
10%,20
)
= $60([1/0.10]-[1/(0.1*(1+0.10)
20
)]) + $1,000((1+0.10)
-20
)
= $60(8.5136) + $1,000(0.1486)
= $510.82 + $148.60 = $659.42.
Alternatively, using a financial calculator, input N = 20, I = 10, PMT = 60, and FV = 1000 to
arrive at a PV = $659.46.
The total market value of the long-term debt is 30,000($659.46) = $19,783,800.
There are 1 million shares of stock outstanding, and the stock sells for $60 per share.
Therefore, the market value of the equity is $60,000,000.
The market value capital structure is thus:
Short-term debt
$10,000,000
11.14%
Long-term debt
19,783,800
22.03
Common equity
60,000,000
66.83
$89,783,800
100.00%
11-10 Financial calculator solution, NPV:
Project S
Inputs N=5 I=12 PMT=3000 FV=0
Output = PV = -10,814.33
NPV
S
= $10,814.33 - $10,000 = $814.33.
Project L
Inputs N=5 I=12 PMT=7400 FV=0
Output = PV = -26,675.34
NPV
L
= $26,675.34 - $25,000 = $1,675.34.
Financial calculator solution, IRR:
Input CF
0
= -10000, CF
1
= 3000, N
j
= 5, IRR
S
= ? IRR
S
= 15.24%.
Input CF
0
= -25000, CF
1
= 7400, N
j
= 5, IRR
L
= ? IRR
L
= 14.67%.
Financial calculator solution, MIRR:
Project S