UGBA103_pb_set9_Solutions - Problem Set #9 - Solutions GSI:...

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Problem Set #9 - Solutions GSI: Florent Rouxelin 18-2. Suppose Caterpillar, Inc., has 665 million shares outstanding with a share price of $74.77, and $25 billion in debt. If in three years, Caterpillar has 700 million shares outstanding trading for $83 per share, how much debt will Caterpillar have if it maintains a constant debt-equity ratio? E = 665 million × $74.77 = $49.7 billion, D = $25 billion, D/E = 25/49.722 = 0.503. E = 700 million × $83.00 = $58.1 billion. Constant D/E implies D = 58.1 × 0.503 = $29.2 billion. 18-10. Consider Lucent’s project in Problem 5. a. What is the free cash flow to equity for this project? b. What is its NPV computed using the FTE method? How does it compare with the NPV based on the WACC method? a. Using the debt capacity calculated in problem 5, we can compute FCFE by adjusting FCF for after-tax interest expense (D r D (1 – tc)) and net increases in debt (D t – D t-1 ). Year 0 1 2 3 D 46.47 37.91 16.13 0.00 FCF -$100.00 $50.00 $100.00 $70.00 After-tax Interest Exp. $0.00 -$1.84 -$1.50 -$0.64 Inc. in Debt $46.47 -$8.55 -$21.78 -$16.13 FCFE -$53.53 $39.60 $76.72 $53.23 b. 23 39.60 76.72 53.23 NPV 53.53 $85.86 1.10 1.10 1.10 18-16. Tybo Corporation adjusts its debt so that its interest expenses are 20% of its free cash flow. Tybo is considering an expansion that will generate free cash flows of $2.5 million this year and is expected to grow at a rate of 4% per year from then on. Suppose Tybo’s marginal corporate tax rate is 40%. a. If the unlevered cost of capital for this expansion is 10%, what is its unlevered value? b. What is the levered value of the expansion? c. If Tybo pays 5% interest on its debt, what amount of debt will it take on initially for the expansion? d. What is the debt-to-value ratio for this expansion? What is its WACC? e. What is the levered value of the expansion using the WACC method?
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This note was uploaded on 09/11/2011 for the course UGBA 103 taught by Professor Berk during the Spring '07 term at University of California, Berkeley.

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UGBA103_pb_set9_Solutions - Problem Set #9 - Solutions GSI:...

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