Winter 2007 Midterm Solution

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

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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 AFIs 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 DCLs 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 , , ( , , , , )( . ) ....
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Winter 2007 Midterm Solution - MGTC09 L01, L02, L30...

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