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ps%20RK%20Capital%20Structure%20Solutions

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Unformatted text preview: Fuqua Business School Duke University FIN 350 Global Financial Management Solutions to Practice Questions (Leverage) 1. These practice questions are a suplement to the problem sets, and are intended for those of you who want more practice. They are Optional, and are not part of the required material. 2. It is recommended that you look at these problems only after you fully understand how to solve the problem sets, the examples we covered in class, and the ones in the lecture notes. 3. Please note that I have collected these exmples from previous teaching material I have had. As such, while in most cases the notation will match the one used in class, the match is not 100%. 4. Some of these questions are easier than the ones you are expected to know how to solve, while others are above the level of knowledge you are expected to show on quizes and the final. ENJOY! FIN 350 Solutions to Practice Questions 2 1. (a) (i) Projects X, Y and Z have returns greater than 12%. (ii) Using the SML ( r equity = r f + β ( r M- r f )) to calculate the required return for each project we get: E( r W ) = . 05 + . 60( . 12- . 05) = . 0920 < . 11, so accept W. E( r X ) = . 05 + . 85( . 12- . 05) = . 1095 < . 13, so accept X. E( r Y ) = . 05 + 1 . 15( . 12- . 05) = . 1305 > . 13, so reject Y. E( r Z ) = . 05 + 1 . 50( . 12- . 05) = . 1550 < . 19, so accept Z. (iii) Project W would be incorrectly rejected; project Y would be incorrectly accepted....
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