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Bus361 solutions to suggested problems of Chapter 10

Bus361 solutions to suggested problems of Chapter 10 -...

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Chapter 10 The Cost of Capital Solutions to End-Of-Chapter Problems 10-1 r d (1 – T) = 0.12(0.65) = 7.80%. 10-2 P p  = $47.50; D p  = $3.80; r p  = ? r p p p P D  =  50 . 47 $ 80 . 3 $  = 8%. 10-3 40% Debt; 60% Common equity; r d  = 9%; T = 40%; WACC = 9.96%; r s  = ? WACC= (w d )(r d )(1 – T) + (w c )(r s ) 0.0996= (0.4)(0.09)(1 – 0.4) + (0.6)r s 0.0996= 0.0216 + 0.6r s 0.078 = 0.6r s r s = 13%. 10-4 P 0  = $30; D 1  = $3.00; g = 5%; r s  = ? a. r s  =  0 1 P D  + g =  00 . 30 $ 00 . 3 $  + 0.05 = 15%. b. F = 10%; r e  = ? r e  =  ) F 1 ( P D 0 1 -  + g ) 10 . 0 1 ( 30 $ 00 . 3 $ -  + 0.05 00 . 27 $ 00 . 3 $  + 0.05 = 16.11%. 10-5 Projects A, B, C, D, and E would be accepted since each project’s return is greater than the  firm’s WACC.
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10-6 a. r s  =  0 1 P D  + g =  23 $ 14 . 2 $  + 7% = 9.3% + 7% = 16.3%. b. r s = r RF  + (r M  – r RF )b = 9% + (13% – 9%)1.6 = 9% + (4%)1.6 = 9% + 6.4% = 15.4%. c. r s  = Bond rate + Risk premium = 12% + 4% = 16%.
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