S07Assg9soln

# S07Assg9soln - FIN 2200 – CORPORATION FINANCE Sum 2007...

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Unformatted text preview: FIN 2200 – CORPORATION FINANCE Sum 2007 Professors: A. Dua Assignment #9 key 1. Assume an M&M world with no taxes. The risk free rate of return is 4% and the market risk premium is 10%. XYZ Corporation could be financed with debt and equity according to the proportions specified in the table below. Fill in all the missing cells in the table below. Proportion of Equity Financing for XYZ Expected Return on XYZ’s Equity Expected Return on XYZ’s Debt XYZ’s WACC % XYZ’s Equity Beta XYZ’s Debt Beta Weighted Average Beta of XYZ’s securities 100% 16% (no debt) 16% 1.20 (no debt) 1.20 80% 18.7% 5.2% 16% 1.47 0.12 1.20 60% 23.2% 5.2% 16% 1.92 0.12 1.20 50% 26.8% 5.2% 16% 2.28 0.12 1.20 40% 30.1% 6.6% 16% 2.61 0.26 1.20 30% 34.2% 8.2% 16% 3.02 0.42 1.20 20% 40% 10% 16% 3.60 0.60 1.20 10% 52% 12% 16% 4.80 0.80 1.20 5% 54% 14% 16% 5.00 1.00 1.20 0% (no equity) 16% 16% (no equity) 1.20 1.20 Solutions: 100% equity: % 16 ) 1 . ( 2 . 1 04 . ) R R ( R r f M S f S = + =-β + = WACC = r = r S =16% 20 . 1 ) 1 . ( 04 . 16 . ) R R ( R WACC firm firm f M firm f = β β + =-β + = 80% equity: % 2 . 5 ) 1 . ( 12 . 04 . ) R R ( R r f M B f B = + =-β + = % 16 187 . 1 8 . 052 . 1 2 . r S B S r S B B WACC S B = + = + + + = 20 . 1 ) 1 . ( 04 . 16 . ) R R ( R WACC firm firm f M firm f = β β + =-β + = 60% equity: % 2 . 5 ) 1 . ( 12 . 04 . ) R R ( R r f M B f B = + =-β + = FIN 2200 – CORPORATION FINANCE Sum 2007 Professors: A. Dua Assignment #9 key % 16 232 . 1 6 . 052 . 1 4 . r S B S r S B B WACC S B = + = + + + = 92 . 1 ) 1 . ( 04 . 232 . ) R R ( R r s s f M s f S = β β + =-β + = 20 . 1 ) 1 . ( 04 . 16 . ) R R ( R WACC firm firm f M firm f = β β + =-β + = 50% equity: % 2 . 5 ) 1 . ( 12 . 04 . ) R R ( R r f M B f B = + =-β + = % 16 268 . 1 5 . 052 . 1 5 . r S B S r S B B WACC S B = + = + + + = 20 . 1 ) 1 . ( 04 . 16 . ) R R ( R WACC firm firm f M firm f = β β + =-β + = 40% equity: % 1 . 30 r ) 066 . 16 . ( 4 . 6 . 16 . ) r r ( S B r r S B S =-+ =-+ = 61 . 2 ) 1 . ( 04 . 301 . ) R R ( R r S S f M S f S = β β + =-β + = % 16 301 . 1 4 . 066 . 1 6 . r S B S r S B B WACC S B = + = + + + = FIN 2200 – CORPORATION FINANCE Sum 2007 Professors: A. Dua Assignment #9 key 20 . 1 ) 1 . ( 04 . 16 ....
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## This note was uploaded on 04/06/2010 for the course ECON 2342 taught by Professor James during the Three '09 term at ADFA.

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S07Assg9soln - FIN 2200 – CORPORATION FINANCE Sum 2007...

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