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Exam 2 - ANSWERS BADM 115 – Fall 2008 – Professor Isabelle Bajeux-Besnainou 1. Constant cash flows; 3 years WACC: 10.00% 0123 Cash flows -\$1,000 \$500 \$500 \$500 Answer: WACC: 10.0% NPV = \$243.43 Year 0: -\$1,000 2. Coupon rate 7.00% Periods/year 4 Maturity (yr) 20 Bond price \$1,103.58 Par value \$1,000 Tax rate 40% Calculator inputs: N 80 PV -\$1,103.58 PMT \$17.50 FV \$1,000 I/YR 1.52% times 4 = 6.1% = Before-tax cost of debt 3.66% = After-tax cost of debt (A-T r d ) for use in WACC 3. Answer: “Changes in required returns due to financing decisions” 4. Constant growth valuation D 1 \$1.00 r s 11% g 5% P 0 \$16.67 5. Uneven cash flows; 4 years 4 Cash flows -\$1,000 \$250 \$230 \$210 \$190 Answer: IRR = -5.15% Year 0: -\$1,000 6. Weights Rate AT Costs Debt 40% 7.50% 4.50% Preferred 10% 7.00% Common 50% 11.50% Tax rate 40% WACC 8.25%

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7. Straight line depreciation, constant cash flows Answer: t = 0 t = 1 t = 2 t = 3 Investment cost -\$65,000 Sales revenues \$70,000 \$70,000 \$70,000 - Operating costs (x-depr) -\$25,000 -\$25,000 -\$25,000 - Basis x rate = depreciation = -\$21,667 -\$21,667 -\$21,667 Operating income (EBIT) \$23,333 \$23,333 \$23,333 - Taxes -\$8,167 -\$8,167 -\$8,167 After-tax EBIT \$15,167 \$15,167 \$15,167 + Depreciation \$21,667 \$21,667 \$21,667 Operating cash flow -\$65,000 \$36,833 \$36,833 \$36,833 NPV \$26,599.05 8. Constant growth valuation; CAPM D 0 \$1.00 b 1.20 r RF 3.0% RP M 5.0% g 5.0% D 1 \$1.05 r s 9.0% P 0 \$26.25
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