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
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