MGFC10_Chapter18_ClassProblems.pdf - MGFC10H3(Intermediate Finance Class Problems on Valuation and Capital Budgeting for the Levered Firm Instructor

MGFC10_Chapter18_ClassProblems.pdf - MGFC10H3(Intermediate...

This preview shows page 1 - 2 out of 4 pages.

MGFC10H3 (Intermediate Finance) Class Problems on Valuation and Capital Budgeting for the Levered Firm Instructor: Syed W. Ahmed QUESTION 1: Playful Bull Limited has produced rodeo supplies for over 20 years. The company currently has a debt/equity ratio of 45% and is in the 40% tax bracket. The required rate of return on the firm’s levered equity is 15.75%. Playful Bull is planning to expand its production capacity. The equipment to be purchased is expected to generate the following unlevered cash flows: Year 0 1 2 3 Cash Flow -$27,000,000 9,000,000 15,000,000 12,000,000 The company has arranged a $14,000,000 debt issue to partially finance the expansion. Under the loan, the company would pay interest of 8.8% at the end of each year on the outstanding balance at the beginning of the year. The company would also make year-end principal payments of $5,510,000 per year, completely retiring the issue at the end of the 3 rd year. Using the adjusted present value approach, should the company proceed with the expansion? QUESTION 2: Hamilton Beach Corporation’s stock returns have a covariance with the market portfolio of 0.048. The standard deviation of returns on the market portfolio is 20%, and the expected market risk premium is 7.5%. The company has bonds outstanding with a total market value of $30 million and a yield to maturity of 8%. The company also has 5 million shares of common stock outstanding each selling for $20. The company’s CEO considers the firm’s current debt/equity ratio optimal. The corporate tax rate
Image of page 1
Image of page 2

You've reached the end of your free preview.

Want to read all 4 pages?

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

Stuck? We have tutors online 24/7 who can help you get unstuck.
A+ icon
Ask Expert Tutors You can ask You can ask You can ask (will expire )
Answers in as fast as 15 minutes
A+ icon
Ask Expert Tutors