UGBA 103 _5 Answers - UGBA 103 Summer 2010 Haas School of...

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Unformatted text preview: UGBA 103 Summer 2010 Haas School of Business John Gonzales Assignment #5 Answers 10-2. r D = 8%(1 - .35) = 5.20%. 10-3. r PS = D PS /[P PS ] = 4.50/50 = 9.00%. 10-5. r S = D 1 /P + g = 3/36 + 5% = 13.33%. 10-7. WACC = .30[6%(1 - .4)] + .05(5.8%) + .65(12%) = 9.17%. 10-10. (a) r s = [2.14/23] + 7% = 16.30%. (b) r s = 9% + 1.6(13% - 9%) = 15.40%. 10-15. (a) Common equity = 50% of $30 million = $15 million. (b) r s = 4% + 8% = 12%; WACC = .5[8%(1 - .4)] + .512% = 8.40%. (c) Now, r s and WACC increase due to flotation costs. 10-16. The book value of current liabilities = market value of sort-term debt. The market value of long-term debt = PV of debt. The bond price is $659.42 and there are 30,000 bonds, so long-term debt = 30,000($659.42) = $19,783,800. The market value of equity is 1,000,000($60) = $60,000,000. Market Value Capital Structure Short-term debt: $10,000,000 11.14% Long-term debt: $19,783,800 22.03% Common equity: $60,000,000 66.83% 2. (a) r d (1 - T) = 7%. r PS = 5/49 = 10.20%. r e = [3.50/36] + 6% = 15.72%. (b) WACC = .15[10(1 - .3)] + .10(10.20) + .75(15.72) = 13.86%. (c) The firm should undertake projects 1 and 2, with the optimal capital budget, i.e. total capital spent, equal to $5,000. Projects 1 and 2 have an IRR > WACC....
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This note was uploaded on 07/17/2010 for the course UGBA 18195 taught by Professor Johngonzales during the Summer '10 term at University of California, Berkeley.

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UGBA 103 _5 Answers - UGBA 103 Summer 2010 Haas School of...

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