chap012solutions - Solutions to Chapter 12 Weighted Average...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Solutions to Chapter 12 Weighted Average Cost of Capital and Company Valuation 1. The yield to maturity for the bonds (since maturity is now 19 years) is the interest rate (r) that is the solution to the following equation: [$80 × annuity factor(r, 19 years)] + [$1,000/(1 + r) 19 ] = $1,050 050 , 1 $ ) r 1 ( 000 , 1 $ r) (1 r 1 r 1 $80 19 19 = + + + × - × r = 7.50% Using a financial calculator, enter: n = 19, FV = 1000, PV = (-)1050, PMT = 90, and then compute i = 7.50% Therefore, the after-tax cost of debt is: 7.50% × (1 – 0.35) = 4.88% 2. % 0 . 10 100 . 0 40 $ 4 $ P DIV r 0 = = = = 3. × + × + - × × = equity preferred C debt r V E r V P ) T 1 ( r V D WACC = [0.3 × 7.50% × (1 – 0.35)] + [0.2 × 10%] + [0.5 × 12.0%] = 9.46% 4. % 75 . 13 1375 . 0 05 . 0 60 $ 05 . 1 5 $ g P ) g 1 ( DIV g P DIV r 0 0 0 1 = = + × = + + = + = 5. The total value of the firm is $80 million. The weights for each security class are as follows: Debt: D/V = 20/80 = 0.250 Preferred: P/V = 10/80 = 0.125 Common: E/V = 50/80 = 0.625 × + × + - × × = equity preferred C debt r V E r V P ) T 1 ( r V D WACC = [0.250 × 6% × (1 – 0.35)] + [0.125 × 8%] + [0.625 × 12.0%] = 9.475% 12-1
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
6. Executive Fruit should use the WACC of Geothermal, not its own WACC, when evaluating an investment in geothermal power production. The risk of
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

Page1 / 4

chap012solutions - Solutions to Chapter 12 Weighted Average...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online