MBA 737 Hinson Assignment 4-1

# MBA 737 Hinson Assignment 4-1 - MBA 737 Assignment 4-1...

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MBA 737 Assignment 4-1 Graded Problems for Week 4 Jamie Hinson October 20, 2010 Problem 1 on page 388 Cost of equity = Risk free rate + beta*(Expected return – risk free rate) = 5.2% + 0.85*(12% – 5.2%) = 5.2% + 0.85*6.8% = 10.98% Problem 3 on page 388 We have C = 0.09/2*1000 = 45, n = 26*2 = 52 and FV = \$1000. a. Bond price = C*(PVIFA @ YTM, n) + FV*(PVIF @YTM, n) 1120 = 45*([email protected], 52) + 1000*([email protected], 52) By trial and error method, At I = 3%, YTM = 1392.49 At I = 4%, YTM = 1108.74 By interpolation, 3% + (1392.49 – 1120)/ (1392.49 – 1108.74) 3% + 95% 3.95% Pre-tax cost of debt = 3.95% b. Post-tax cost of debt = 3.95%*(1 – 0.35) = 2.5675% c. The after-tax rate is more relevant because that is the actual cost to the company.

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Page 11 on page 389 Cost of debt, rd Bond price = C*(PVIFA @rd, n) + FV*(PVIF @rd, n) 1090 = 47*(PVIFA @ rd, 50) + 1000*(PVIF @ rd, 50) By trial and error method, Rd = 4.26% rE = Risk free rate +beta* Market risk premium = 5.5% + 1.12*6.5% = 12.78% WACC = rd*wd*(1 – tax rate) + rE*wE
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MBA 737 Hinson Assignment 4-1 - MBA 737 Assignment 4-1...

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