ch15solution_prob

ch15solution_prob - CHAPTER 15 B-1 Answers to Concepts...

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CHAPTER 15 B-1 Answers to Concepts Review and Critical Thinking Questions 1. It is the minimum rate of return the firm must earn overall on its existing assets. If it earns more than this, value is created. 3. No. The cost of capital depends on the risk of the project, not the source of the money. Solutions to Questions and Problems Basic 2. Here we have information to calculate the cost of equity using the CAPM. The cost of equity is: R E = .045 + 1.20 (.12 – .045) = .1470 or 14.70% 5. The cost of preferred stock is the dividend payment divided by the price, so: R P = CNY 48/CNY 725 = .0662 or 6.62% 6. The pretax cost of debt is the YTM of the company’s bonds, so: P 0 = RUR 1,040 = RUR 40(PVIFA R%,24 ) + RUR 1,000(PVIF R%,24 ) R = 3.745% YTM = 2 × 3.745% = 7.49% And the aftertax cost of debt is: R D = .0749(1 – .35) = .0487 or 4.87% 7. a. The pretax cost of debt is the YTM of the company’s bonds, so: P 0 = $1,080 = $45(PVIFA R%,36 ) + $1,000(PVIF R%,36 ) R = 4.075% YTM = 2 × 4.075% = 8.15% b. The aftertax cost of debt is: R D = .0815(1 – .35) = .0529 or 5.29% c. The after-tax rate is more relevant because that is the actual cost to the company. 9.
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ch15solution_prob - CHAPTER 15 B-1 Answers to Concepts...

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