FIN3300 Solution Ch14 (M 0816)

# FIN3300 Solution Ch14 (M 0816) - Solution Chapter 14 Cost...

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Solution Chapter 14: Cost of Capital Page 466 Questions: 11, 12, 15, 17, 19 11. Here we have the WACC and need to find the debt-equity ratio of the company. Setting up the WACC equation, we find: WACC = .0890 = .12(E/V) + .079(D/V)(1 – .35) Rearranging the equation, we find: .0890(V/E) = .12 + .079(.65)(D/E) Now we must realize that the V/E is just the equity multiplier, which is equal to: V/E = 1 + D/E .0890(D/E + 1) = .12 + .05135(D/E) Now we can solve for D/E as: .06765(D/E) = .031 D/E = .8234 12. a. The book value of equity is the book value per share times the number of shares, and the book value of debt is the face value of the company’s debt, so: BV E = 11,000,000(\$6) = \$66,000,000 BV D = \$70,000,000 + 55,000,000 = \$125,000,000 So, the total value of the company is: V = \$66,000,000 + 125,000,000 = \$191,000,000 And the book value weights of equity and debt are: E/V = \$66,000,000/\$191,000,000 = .3455 D/V = 1 – E/V = .6545 b. The market value of equity is the share price times the number of shares, so: MV E = 11,000,000(\$68) = \$748,000,000 1

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Using the relationship that the total market value of debt is the price quote times the par value of the bond, we find the market value of debt is: MV D = .93(\$70,000,000) + 1.04(\$55,000,000) = \$122,300,000
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