{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

c09reviewproblems.solution.2009

# c09reviewproblems.solution.2009 - UNIVERSITY OF TORONTO at...

This preview shows pages 1–4. Sign up to view the full content.

UNIVERSITY OF TORONTO at Scarborough MANAGEMENT MGTC09 (Intermediate Finance) Solutions for the Review Problems Professor: Syed W. Ahmed EXAM 1 Answer 1 (Cost of Capital) S = 12,000,000(\$50) = \$600,000,000 B 1 = \$200,000,000(0.9194) = \$183,880,000 B 2 = \$300,000,000(0.9329) = \$279,870,000 V = S + B 1 + B 2 = \$600,000,000+183,880,000+279,870,000 = \$1,063,750,000 S/V = 600,000,000/1,063,750,000 = 0.564 B/V = (183,880,000+279,870,000)/1,063,750,000 = 0.436 a. r B = × + + × + = 0 09 183880 183 880 279 870 0 08 279 870 183 880 279 870 0 083965 . , , , . , , , . r D g P g S = + + = + = 0 0 1 2 108 50 008 01232 ( ) ( . ) . . WACC = 0.1232(0.564) + 0.083965(1-0.4)(0.436) = 0.09145 b. ( 29 ( 29 ( 29 NPV = - - + - + - ÷ 60 000 000 1 010 8 000 000 1 1 109145 0 09145 6 000 000 1 1 109145 0 09145 109145 10 15 10 , , . , , . . , , . . . = -\$66,666,667+51,015,202+19,988,330 = \$4,336,865 Answer 2 (Capital Structure) a. Her cash flow = (2,000,000-0.1(4,000,000))(300,000/6,000,000) = \$80,000 r s = 80,000/300,000 = 0.2667 = 26.67% b. Sell all FRL’s shares; nets \$300,000. Borrow \$200,000 @ 10%. Interest cash flow = -\$20,000. Use proceeds from selling shares and the borrowed funds to buy DFC’s shares: Her total cash flow now would be \$2,000,000(500,000/10,000,000)-20,000 = \$80,000 r s = 80,000/300,000 = 0.2667 = 26.67% c. r r r r B S s B DFC = + - = = 0 0 2 000 000 10 000 000 020 ( ) , , / , , . r r r r B S s B FRL = + - = + - = 0 0 0 20 020 010 4 6 0 2667 ( ) . ( . . ) . d. WACC DFC = 0.20 WACC r S V r B V FRL s B = + = + = 0 2667 6 10 010 4 10 0 20 . . . When there are no corporate taxes, the cost of capital for the firm is unaffected by the capital structure.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
-2- Answer 3 (Capital structure) a. V EBIT T WACC L c = - = - = ( ) , ( . ) . \$1, , 1 331330 1 0 40 011694 700 000 V V T B U L c = - = - = 1 700 000 0 4 700 000 1 420 000 , , . ( , ) , , c) The firm has increased its value by \$280,000 by issuing debt. As long as M&M Proposition I holds i.e. there are no bankruptcy costs and so forth then the firm should continue to increase its B/S ratio to maximize its value. Answer 4 (Capital Structure) a. The equilibrium interest rate paid by the corporations is 0.09/(1-0.4) = 0.15 = 15% Given the tax rates for the various groups, the investors will invest in bonds for interest rates that exceed: A: 0.09/(1-0.5)= 18% Invest in equities B: 0.09/(1-0.4)= 15% Indifferent C: 0.09/(1-0.3)= 12.88% Invest in bonds D: 0.09/(1-0.2)= 11.25% Invest in bonds E: 0.09/(1-0.1)= 10% Invest in bonds If A invests in equities, and B, C, D, and E in bonds, the value of equity will be S EBIT r B T r B c S = - - = - - = ( )( ) ( . ( ))( . ) . \$53. 1 20 015 80 1 0 40 0 09 33 = = D E ratio B S 80 5333 . If A and B invest in equities, and C, D, and E in bonds the value of equity will be S = - - = ( . ( ))( . ) . \$83. 20 015 50 1 0 40 0 09 33 = = D E ratio B S 50 8333 . Thus D/E ratio can range from 50/83.33 to 80/53.33 b. Taxes paid by corporations (\$20-0.15(80))0.40 = \$3.2 billion Taxes paid by investors B: \$30(0.15)(0.40) = \$1.8 billion C: \$20(0.15)(0.30) = 0.9 billion D: \$10(0.15)(0.20) = 0.3 billion E: \$20(0.15)(0.10) = 0.3 billion Total Tax Bill \$6.5 billion
-3- EXAM 2 Question 1 (Valuation and Capital Budgeting for the Levered Firm) a. ( 29 ( 29 ( 29 NPV I I = = - + + - - + - - 0 1 000 000 400 000 1 0 40 1 1 112 012 1000 000 10 0 40 1 1 105 0 05 10 10 ( , , ) , ( . ) . . , , . . . = -I + 1,000,000 + 1,356,054 – 308,869 + 0.3088694I I = \$2,962,081 b. ( 29 ( 29 ( 29 PVofTaxShield = + + + + 0 4 0 08 2 000 000 108 0 4 0 08 1 600 000 108 2 0 4 0 08 1 200 000 108 3 0 4 0 08 800 000 108 4 0 4 0 08 400 000 108 5 . ( . ) , , . . ( . ) , , ( . ) . ( . ) , , . . ( . ) , . . ( . ) , . = 59,259 + 43,896 + 30,483 + 18,817 + 8,711 = \$161,166 ( 29 ( 29 ( 29 NPV = - + + - - + - - 2 500 000 1000 000 400 000 1 04 1 1 112 012 2 500 000 1 000 000 10 0 40 1 1 105 0 05 10 10 , , , , , ( . ) . . , , , , . . . NPV = -2,500,000 + 1,000,000 + 1,356,054 + 463,302 = \$319,356 APV = \$319,356 + 161,166 = \$480,522 c. ( 29 ( 29 ( 29 APV = 0 = (-I + 1,000,000) + 1,356,054 + I - 1,000,000 10 ( . ) .

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern