Assignment #11 answers

Assignment #11 answers - Answers to Assignment No. 11...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Answers to Assignment No. 11 Chapter 12- Questions and Problems: Answer to Q 5 The total value of the firm is $80 million. The weights for each security class are: Debt: D/V = 20/80 = .250 Preferred: P/V = 10/80 = .125 Common: E/V = 50/80 = .625 WACC = D V r debt (1 T c ) + P V r preferred + E V r equity = .25 8% (1 .35) + .125 10% + .625 15% = 11.925% Answer to Q 12 Because the firm is all-equity financed, asset beta = equity beta = .8. The WACC is the same as the cost of equity which may be calculated using the CAPM: r equity = r f + (r m r f ) = 5% + .8 10% = 13% Answer to Q 13 The 12.5% value calculated by the analyst is the current yield of the firms outstanding debt: interest payments/bond value. This calculation neglects the fact that bonds selling at discounts from or premiums over par value provide expected returns determined in part by expected price appreciation or depreciation. The analyst should be using yield to maturity instead of current yield appreciation or depreciation....
View Full Document

Page1 / 2

Assignment #11 answers - Answers to Assignment No. 11...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online