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HW7sol

# HW7sol - Solution to Problem Set 7 FINA 4200 Spring 2010 I...

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Solution to Problem Set 7 - FINA 4200 Spring 2010 I. Multiple Choices 1. a 2. a 3. b 4. a 5. a 6. b 7. b 8. b 9. b 10. a 11. d 12. c 13. d 14. e 15. c 16. c 17. b Explanations to multiple choice questions 12. r sL = 8% + 2.0(4%) = 16%; r sU = 0.20(8%) + 0.80(16%) = 14.4% . 13. Price per share = . = million 4 million \$72.52 \$18.13 14. The unlevered cost of equity is 17.5%. All cash flows are discounted at this rate : Time line: (In millions) 0 r sU = 17.5% 1 2 g = 4% 3 Years | | | | -45 +9 +25 (15+5)(1.04)=20.8 -10 HV = 20(1.04) 15 = FCF (0.175 – 0.04) + 2 = 154 17 1 5 4 171 V ops = \$9/(1.175) + \$171/(1.175) 2 = \$131.5 = V equity since there is no debt. The NPV is \$131.5 – \$45 = \$86.5 million . 15. The pre-merger weight of debt is \$5/(\$5 + \$10) = 0.333 The pre-merger required rate of return on equity is 6% + 1.36(4%) = 11.44%. WACC = w d r d (1 – T) + w S r S = 0.333(11%)(1 – 0.40) + 0.667(11.44%) = 9.83% . 16. The correct discount rate is the unlevered cost of equity. The levered cost of equity is 6% + 1.36(4%) = 11.44%, the percent of debt is \$5/(\$5 + \$10) = 0.333. The rate on the debt is 11%. The unlevered cost of equity is w d r d + w s r sL = 0.333(11%) + 0.667(11.44%) =

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17. Because the cash flows are all discounted at the same rate, we don’t need to separately calculate the unlevered value of operations and the value of the tax shield. We can simply enter the sum of the tax shields and free cash flows and their horizon values for each year into the financial calculator: Time line: (In millions) 0 r=11.29% 1 2 3 4 Years | | | | | PV = ?
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HW7sol - Solution to Problem Set 7 FINA 4200 Spring 2010 I...

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