Chapter10Solutions

# Chapter10Solutions - r s = \$3.50/\$36 6 = 15.72 b WACC...

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Chapter 10 Solutions to Problems 10-2 P p = \$47.50; D p = \$3.80; r p = ? r p = p p P D = 50 . 47 \$ 80 . 3 \$ = 8%. 10-6 a. r s = 0 1 P D + g = 23 \$ 14 . 2 \$ + 7% = 9.3% + 7% = 16.3%. b. r s = r RF + (r M – r RF )b = 9% + (13% – 9%)1.6 = 9% + (4%)1.6 = 9% + 6.4% = 15.4%. c. r s = Bond rate + Risk premium = 12% + 4% = 16%. d. Since you have equal confidence in the inputs used for the three approaches, an average of the three methodologies probably would be warranted. r s = 3 % 16 % 4 . 15 % 3 . 16 + + = 15.9%. 10-7 a. r s = 0 1 P D + g = 36 \$ 18 . 3 \$ + 0.06 = 14.83%. b. F = (\$36.00 – \$32.40)/\$36.00 = \$3.60/\$36.00 = 10%. c. r e = D 1 /[P 0 (1 – F)] + g = \$3.18/\$32.40 + 6% = 9.81% + 6% = 15.81%. 10-17 a. r s = 0 1 P D + g 0.09= 00 . 60 \$ 60 . 3 \$ + g 0.09= 0.06 + g g = 3%. b. Current EPS \$5.400 Less: Dividends per share 3 .600 Retained earnings per share \$1.800 Rate of return × 0 .090 Increase in EPS \$0.162 Plus: Current EPS 5 .400 Next year’s EPS \$5 .562

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Alternatively, EPS 1 = EPS 0 (1 + g) = \$5.40(1.03) = \$5.562. 10-18 a. r d (1 – T) = 0.10(1 – 0.3) = 7%. r p = \$5/\$49 = 10.2%.
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Unformatted text preview: r s = \$3.50/\$36 + 6% = 15.72%. b. WACC: After-tax Weighted Component Weight × Cost = Cost Debt [0.10(1 – T)] 0.15 7.00% 1.05% Preferred stock 0.10 10.20 1.02 Common stock 0.75 15.72 11 .79 WACC= 13.86 % c. Projects 1 and 2 will be accepted since their rates of return exceed the WACC. 10-20 a. After-tax cost of new debt: r d (1 – T) = 0.09(1 – 0.4) = 5.4%. Cost of common equity: Calculate g as follows: With a financial calculator, input N = 9, PV = -3.90, PMT = 0, FV = 7.80, and then solve for I/YR = g = 8.01% ≈ 8%. r s = 1 P D + g = 00 . 65 \$ ) 80 . 7 )(\$ 55 . ( + 0.08 = 00 . 65 \$ 29 . 4 \$ + 0.08 = 0.146 = 14.6%. b. WACC calculation: After-tax Weighted Component Weight × Cost = Cost Debt [0.09(1 – T)] 0.40 5.4% 2.16% Common equity (RE) 0.60 14.6 8 .76 WACC= 10.92 %...
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## This note was uploaded on 03/02/2011 for the course BMGT 340 taught by Professor White during the Spring '08 term at Maryland.

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Chapter10Solutions - r s = \$3.50/\$36 6 = 15.72 b WACC...

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