SolutionsExerciseBook7th_Chap13.pdf - Chapter 13 Risk Return and Capital Budgeting 13.1 With the information given we can find the cost of equity using

SolutionsExerciseBook7th_Chap13.pdf - Chapter 13 Risk...

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Answers to End of Chapter Problems 13-1 Chapter 13: Risk, Return, and Capital Budgeting 13.1 With the information given, we can find the cost of equity using the CAPM. The cost of equity is: r S = 0.035 + 1.21(0.11 0.035) = 0.1258, or 12.58% 13.5 a. The pretax cost of debt is the YTM of the company’s bonds, so: P 0 = $1,080 = $31 46 r A + $1,000/(1+r) 46 r = 2.789% r B = 2 × 2.789% = 5.58% b. The aftertax cost of debt is: Aftertax cost of debt = 5.58%(1 0.35) = 3.63% c. The aftertax rate is more relevant because that is the actual cost to the company. 13.8 Here we need to use the debt-equity ratio to calculate the WACC. Doing so, we find: WACC = 0.14(1/1.55) + 0.07(0.55/1.55)(1 0.35) = 0.1065, or 10.65% 13.13 We will begin by finding the market value of each type of financing. We find: B = 5,000($1,000)(1.05) = $5,250,000 S = 175,000($58) = $10,150,000
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