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# fm10 4 - lower cost of equity values than the DCF method...

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10-8 40% Debt; 60% Equity; r d = 9%; T = 40%; WACC = 9.96%; r s = ? WACC = (w d )(r d )(1 - T) + (w ce )(r s ) 9.96% = (0.4)(9%)(1 - 0.4) + (0.6)r s 9.96% = 2.16% + 0.6r s 7.8% = 0.6r s r s = 13%. 10-9 Enter these values: N = 60, PV = -515.16, PMT = 30, and FV = 1000, to get I = 6% = periodic rate. The nominal rate is 6%(2) = 12%, and the after-tax component cost of debt is 12%(0.6) = 7.2%. 10-10 a. r s = 0 1 P D + g = 23 \$ 14 . 2 \$ + 7% = 9.3% + 7% = 16.3%. b. r s = r RF + (r M - r RF )b = 9% + (13% - 9%)1.6 = 9% + (4%)1.6 = 9% + 6.4% = 15.4%. c. r s = Bond rate + Risk premium = 12% + 4% = 16%. d. The bond-yield-plus-risk-premium approach and the CAPM method both resulted in
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Unformatted text preview: lower cost of equity values than the DCF method. The firm's cost of equity should be estimated to be about 15.9 percent, which is the average of the three methods. 10-11 a. \$6.50 = \$4.42(1+g) 5 (1+g) 5 = 6.50/4.42 = 1.471 (1+g) = 1.471 (1/5) = 1.080 g = 8%. Alternatively, with a financial calculator, input N = 5, PV = -4.42, PMT = 0, FV = 6.50, and then solve for I = 8.02% ≈ 8%. b. D 1 = D (1 + g) = \$2.60(1.08) = \$2.81. c. r s = D 1 /P + g = \$2.81/\$36.00 + 8% = 15.81%. Answers and Solutions: 10 - 4...
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