Winter 2007 Midterm Solution

# Winter 2007 Midterm Solution - MGTC09 L01 L02 L30&...

This preview shows pages 1–3. Sign up to view the full content.

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.

Unformatted text preview: MGTC09 L01, L02, L30 & L31Winter 2007 Answer 1: a. Her cash flow = (10,000,000-0.09(10,000,000))(1,000,000/40,000,000) = \$227,500 r s = 227,500/1,000,000 = 0.2275 = 22.75% b. Sell all AFI’s shares; nets \$1,000,000. Borrow \$250,000 @ 9%. Interest cash flow = -\$22,500 . Use proceeds from selling shares and the borrowed funds to buy DCL’s shares: Her total cash flow now would be \$10,000,000(1,250,000/50,000,000)-22,500 = \$227,500 r s = 22,7500/1,000,000 = 0.2275 = 22.75% c. r r r r B S s B DCL = +- = = 10 000 000 50 000 000 0 20 ( ) , , / , , . r r r r B S s B AFI = +- = +- = 0 20 0 20 0 09 1 4 0 2275 ( ) . ( . . ) . d. WACC DCL = 0.20 WACC r S V r B V AFI s B = + = + = 0 2275 4 5 0 09 1 5 0 20 . . . When there are no corporate taxes, the cost of capital for the firm is unaffected by the capital structure. Answer 2: a. Sales \$20,000,000 Fixed Cost 5,200,000 Variable Cost 8,000,000 Total Cost Before I & T 13,200,000 EBIT 6,800,000 B = \$10,000,000 V = B + S = 10,000,000 + 24,000,000 = \$34,000,000 B = \$14,000,000 I = (10,000,000 x 0.08) + (4,000,000 x 0.09) = \$1,160,000 V = B + S = B EBIT I T r c s +-- ( )( ) 1 = +-- = + = 14 000 000 6 800 000 1160 000 1 0 40 016 14 000 000 21150 000 150 000 , , ( , , , , )( . ) ....
View Full Document

{[ snackBarMessage ]}

### Page1 / 4

Winter 2007 Midterm Solution - MGTC09 L01 L02 L30&...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online