FI516_WEEK_2_HOMEWORK_ANSWER_KEY

FI516_WEEK_2_HOMEWORK_ANSWER_KEY - FI-516 WEEK 2 HOMEWORK...

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Unformatted text preview: FI-516 WEEK 2 HOMEWORK ANSWER KEY Problem 159 15-9 a. Present situation (50% debt): WACC = wd rd(1-T) + wcers = (0.5)(10%)(1-0.15) + (0.5)(14%) = 11.25%. V = = $100 million. 70 percent debt: WACC = wd rd(1-T) + wcers = (0.7)(12%)(1-0.15) + (0.3)(16%) = 11.94%. V = = $94.255 million. 30 percent debt: WACC = wd rd(1-T) + wcers = (0.3)(8%)(1-0.15) + (0.7)(13%) = 11.14%. V = = $101.023 million. Problem 1510 15-10 a. BEA's unlevered beta is bU=b/(1+ (1-T)(D/S))=1.0/(1+(1-0.40)(20/80)) = 0.870. b. b = bU (1 + (1-T)(D/S)). At 40 percent debt: bL = 0.87 (1 + 0.6(40%/60%)) = 1.218. rS = 6 + 1.218(4) = 10.872% c. WACC = wd rd(1-T) + wcers = (0.4)(9%)(1-0.4) + (0.6)(10.872%) = 8.683%. V = = $103.188 million. Problem 268 26-8 a. VU = $500,000/(rsU g) = $500,000/(0.13 - 0.09) = 12,500,000. b. So since D = 5, then S = 16 5 = $11.0 million. = 15.7% c. Under MM, VL = VU + TD = $12.5 million + (0.40)(5 million) = $14.5 million. S = $14.5 5 = $9.5 million. rsL = 0.13+(0.13-0.07)(1-.40)(5/9.5) = 14.9% d. VL is greater under the extension that incorporates growth than under MM because MM assumes 0 growth. A positive growth rate gives a larger value to the tax shield. In this case. the value of the tax shield under MM is 2.0 million and is $3.5 million if growth is included. The cost of capital when growth is included is higher because the relative weight of equity is higher and the relative weight of debt is lower than when growth is ignored. ...
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FI516_WEEK_2_HOMEWORK_ANSWER_KEY - FI-516 WEEK 2 HOMEWORK...

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