chap012solutions

# chap012solutions - Solutions to Chapter 12 Weighted Average...

• Notes
• 4

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

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

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

6. Executive Fruit should use the WACC of Geothermal, not its own WACC, when evaluating an investment in geothermal power production. The risk of the project determines the discount rate, and in this case, Geothermal’s WACC is more reflective of the risk of the project in question.
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern