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

Info icon This preview shows pages 1–11. Sign up to view the full content.

View Full Document Right Arrow Icon
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
Image of page 1

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

View Full Document Right Arrow Icon
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
Image of page 2
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.
Image of page 3

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

View Full Document Right Arrow Icon
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
Image of page 4
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%
Image of page 5

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

View Full Document Right Arrow Icon
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
Image of page 6
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
Image of page 7

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

View Full Document Right Arrow Icon
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.
Image of page 8
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
Image of page 9

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

View Full Document Right Arrow Icon
Solution Legend = Value given in problem
Image of page 10
Image of page 11
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    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.

    Student Picture

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

  • Left Quote Icon

    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.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    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.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern