PQ5_A - Total: 627,360...

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FINA 537 Equity Valuation – WACC and APV (Answer) Assignments for practice (No need to submit) 1.a Market value of Equity: 9.5*28=266 (Book) value of Debt: 55%*(10.25*9.5/45%)=119 Unlevered Beta=1.02 1b. D/V=40% D/E=67% Equity beta= 1.35 (based on unlevered beta). R(e) =12.98 (based on CAPM) WACC=8.97% 1c. FCF(2008-2011)=$6163 PV(terminal value)=$25289 Total Value=$31451.91 2. Disagree. The Banker’s Tryst calculations are based on the assumption that the cost of debt will remain constant, and that the cost of equity capital will not change even though the firm’s financial structure has changed. The former assumption is appropriate while the latter is not. (Preferred stock is senior than the common stock in that they get paid first.) 3. Short term debt: 75600 Long term debt: 208600 Share holder equity: 343160 (market value)
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Unformatted text preview: Total: 627,360 WACC=E/V*Re+STD/V*(1-t)*Rd_ST+LTD/V*(1-t)*Rd_LT=10.40% 4. WACC=7%*(1-0.35)*0.4+0.14*0.6=10.22% NPV=-1,000,000+130,000/10.22%=272,016 The issue costs are: Stock issue: (0.05*1,000,000)=$50,000 Bond issue: (0.015*1,000,000)=$15,000 Debt is less expensive. Project’s APV is 272,016- 15,000=257,016. However, if the debt is used, the firm’s debt ratio will be above the target ratio and more equity will have to be raised later. If no fixed cost with issuance, to keep firm at their optimal debt level, firm should issue 40% debt and 60% equity. Cost would be 0.015*1,000,000*40%+0.05*1,000,000*60%=36,000 The project’s APV is 272,016-36,000=$236,016 The cost of debt and equity are not 8.5% and 19%, respectively. These figures assume the issue costs are paid every year, not just at issue....
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PQ5_A - Total: 627,360...

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