3e Chapter04_solutions.xlsx

# 3e Chapter04_solutions.xlsx - PROBLEM 4-1 Given As a summer...

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PROBLEM 4-1 Given As a summer intern you are asked to prepare a spreadsheet calculating the project free cash flow associated with a project your employer is considering. Initially your boss assumes that no debt would be used to fund the project. During your presentation to the committee that evaluates projects, you learn that, in fact, the project will be financed with 25% debt. Are the following statements are either true or false (explain your answer): Answer: a. You need to go back to your office and adjust the project's free cash flows to includ False, free cash flows are calculated under the assumption that the project is 100% equi b. You need to go back to your office and adjust the project cash flows to update the provided by taking on debt. False, for the above reason. c. Your cash flow model does not need to be updated because the financing of the pr cash flow calculation. True d. The WACC should be lowered to reflect the cheaper cost of the debt financing. True

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Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output de the interest on the debt. ity financed. taxes paid due to the tax shield roject does not affect the free
PROBLEM 4-2 Given Describe the difference between a promised and an expected cash flow. If promised cash flows tend to be higher than expected cash flows should they be discounted at rates that are higher or lower than the firm's WACC? Answer: Promised cash flows generally ignore some negative event, like project failure or politica be discounted at a higher rate.

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Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output al risk, and as a result, should
PROBLEM 4-3 Given Cost of debt 6% Tax Rate 30% Cost of equity 14% Debt/EV 20% Part a. Solution Source Proportion After-tax cost Product Debt 20% 4.20% 0.84% Equity 80% 14.00% 11.20% WACC 12.04% Part b. Solution Source Proportion After-tax cost Product Debt 40% 4.90% 1.96% Equity 60% 16.00% 9.60% WACC 11.56%

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Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output
PROBLEM 4-4 Given Face value \$ 1,000.00 = Value giv Current price \$ 1,081.26 = Formula Maturity 8 years = Qualitati Terms semi-annual interest only = Goal See Coupon rate 7.25% = Crystal B = Crystal B Solution Semi-annual YTM 2.98% Annual YTM 6.05% Note: To convert the sem perform the following com

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Solution Legend ven in problem a/Calculation/Analysis required ive analysis or Short answer required ek or Solver cell Ball Input Ball Output mi-annual YTM to it's annual YTM equivalent we mputation: = (1 + .0298)^2 - 1.
PROBLEM 4-5 Given McDonald's levered beta 0.56 Risk free rate 4.20% Market risk premium 5% McDonald's debt \$ 15.00 billion McDonald's Enterprise Value \$ 80.00 billion McDonald's Debt beta 0.2 Solution McDonald's Ke a. 7.00% Unlevered Beta b. 0.4925

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Solution Legend = Value given in problem
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