CHAPTER_19 - CHAPTER 19 Financing and Valuation Answers to...

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1 CHAPTER 19 Financing and Valuation Answers to Problem Sets 1. Market values of debt and equity are D = .9 X 75 = $67.5 million and E = 42 X 2.5 = $105 million. D/V = .39. WACC = .09(1 - .35).39 + .18(.61) = .1325, or 13.25%. 2. Step 1: r = .09(.39) + .18(.61) = .145. Step 2: r D = .086, r E = .145 + (.145 - .086)(15/85) = .155. Step 3: WACC = .086(1 - .35).15 + .155(.85) = .14. 3. a. False b. True c. True 6. APV 5 base-case NPV ± PV financing side effects a. APV = 0 - .15(500,000) = -75,000 b. APV = 0 + 76,000 = +76,000 7. a. 12%, of course. b. r E = .12 + (.12 - .075)(30/70) = .139, WACC = .075(1 - .35)(.30) + .139(.70) = .112, or 11.2%. 8. a. Base-case NPV = -1,000 + 1200/1.20 = 0 b. PV tax shield = (.35 X .1 X .3(1000))/1.1 = 9.55. APV = 0 + 9.55 = $9.55 11. If the bank debt is treated as permanent financing, the capital structure proportions are: Bank debt (r D = 10 percent) $280 9.4% Long-term debt (r D = 9 percent) 1800 60.4 Equity (r E = 18 percent, 90 x 10 million shares) 900 30.2 $2980 100.0%
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CHAPTER_19 - CHAPTER 19 Financing and Valuation Answers to...

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