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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 + β (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 firm’s 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....
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