MGFC10_C09_FW12_Assg2_W2018_solution(2).pdf - ANSWER 1 Tc = 0 Desired B\/S = 1\/3 Vu = $50(1,000,000 = $50,000,000 VL = B S = $12,500,000 37,500,000 =

MGFC10_C09_FW12_Assg2_W2018_solution(2).pdf - ANSWER 1 Tc =...

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ANSWER 1: T c = 0 Desired B/S = 1/3 V u = $50(1,000,000) = $50,000,000 V L = B + S = $12,500,000+37,500,000 = $50,000,000 4 Net Income of V u = E Net Income of V L = E – 6%(12,500,000) = E – $750,000 Saver T s = T B = 0.30 Before Rebalancing 4 She owns $2,000,000/50,000,000 = 0.04= 4% of the firm $ Investment $ Return Stock -2,000,000 0.04E Lending -500,000 +0.06(500,000) -$2,500,000 0.04E+30,000 After tax $ return (0.04E+30,000)(1-0.3) = 0.028E+21,000 After Rebalancing 4 $ Investment $ Return 4% of levered equity -1,500,000 0.04(E-750,000) Lending -1,000,000 +0.06(1,000,000) -$2,500,000 0.04E+30,000 After tax $ return (0.04E+30,000)(1-0.3) = 0.028E+21,000 Investor T s = T B = 0.25 Before Rebalancing 4 He owns $1,000,000/50,000,000 = 2% of the firm $ Investment $ Return Stock -1,000,000 0.02E Borrowing 1,000,000 -0.06(1,000,000) -$0 0.02E-60,000 After tax $ return (0.02E-60,000)(1-0.25) = 0.015E-45,000 After Rebalancing 4 $ Investment $ Return 2% of levered equity -750,000 0.02(E-750,000) Borrowing -750,000 -0.06(750,000) $0 0.02E-60,000 After tax $ return (0.02E-60,000)(1-0.25) = 0.015E-45,000
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