Topic 9 Warm Up Problems with Solutions

# Topic 9 Warm Up Problems with Solutions - Warm up Problems...

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Warm up Problems for Topic 9 (Leverage) **These questions are designed to represent elementary principles, and are NOT representative of problems that you will find on any exams. 1. What is the WACC of a company which is 25% debt financed has a return on equity of 18% and a return on debt that is 8%? WACC=r E (E/V)+r D (D/V) WACC=(.18)(.75)+(.08)(.25) WACC=15.5% 2. If a company has an asset beta of 1.4 and a return on assets of 14%, what is the market risk premium if the risk free rate is 6%? E(r A )=r f + β A (E[r M ]-r f ) .14=.06+1.4(E[r M ]-r f ) (E[r M ]-r f )=5.7% 3. If the same company from question 2 is 80% equity financed and has a debt beta of 0, what is the equity beta? β E = β A +( β A - β D )(D/E) β E =1.4+(1.4-0)(.2/.8) β E =1.75 4. If a company has a return on debt of 7%, a return on equity of 12% and an asset return of 10%, what percent of the company is equity financed? WACC=r

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Topic 9 Warm Up Problems with Solutions - Warm up Problems...

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