12_Sol - Ch. 12 Solutions (Concept) 7. RSup = .12 +...

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Ch. 12 Solutions (Concept) 7. R Sup = .12 + .75(.08) = .1800 or 18.00% Both should proceed. The appropriate discount rate does not depend on which company is investing; it depends on the risk of the project. Since Superior is in the business, it is closer to a pure play. Therefore, its cost of capital should be used. With an 18% cost of capital, the project has an NPV of $1 million regardless of who takes it. 1. With the information given, we can find the cost of equity using the CAPM. The cost of equity is: R E = .045 + 1.30 (.13 – .045) = .1555 or 15.55% 2. The pretax cost of debt is the YTM of the company’s bonds, so: P 0 = $1,050 = $40(PVIFA R%,24 ) + $1,000(PVIF R%,24 ) R = 3.683% YTM = 2 × 3.683% = 7.37% And the aftertax cost of debt is: R D = .0737(1 – .30) = .05159 or 5.16% 12. a. We will begin by finding the market value of each type of financing. We find: MV D = 120,000($1,000)(0.93) = $111,600,000 MV E = 9,000,000($34) = $306,000,000 And the total market value of the firm is:
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This note was uploaded on 10/24/2008 for the course FIN 396002 taught by Professor Na during the Spring '08 term at Auckland University of Technology.

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12_Sol - Ch. 12 Solutions (Concept) 7. RSup = .12 +...

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