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Ch_14_HW_A_Solutions

# Ch_14_HW_A_Solutions - 0.16 0.285714286 0.08(1 – 0.30 =...

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Ch 14 HW A Solutions 1 Ch 14 HW A Solutions 1. P 0 = D 1 / (R – g) D 1 = D 0 (1 + g) = 1.30 ( 1.05 ) = 1.365000000 P 0 = D 1 / (R – g) 22.00 = 1.365000000 / (R – 0.05 ) R = 1.365000000 / 22.00 + 0.05 R = 0.062045455 + 0.05 R = 0.112045455 Cost of Equity = 11.20% 2. P 0 = D / R 31.00 = 6.20 / R R = 6.20 / 31.00 R = 0.200000000 Cost of Preferred Stock = 20.00% 3. N = 14 * 2 = 28 PMT = 85.00 / 2 = 42.50 PV = -1,150.00 FV = 1,000.00 I/Y = ? I/Y = 3.410008078 YTM = I/Y * 2 = 6.820016156 Pretax Cost of debt = 6.82% 4. Tax rate is 35% Aftertax cost of debt = ( 6.820016156 )(1 – 0.35 ) = 4.43%

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Ch 14 HW A Solutions 2 5. WACC = ( 0.34 )( 0.080 ) + ( 0.06 )( 0.065 ) + ( 0.60 )( 0.180 )(1- 0.30 ) = ( 0.34 )( 0.080 ) + ( 0.06 )( 0.065 ) + ( 0.60 )( 0.180 )( 0.70 ) = 0.027200 + 0.003900 + 0.075600 = 0.106700 , WACC = 10.67% 6. Value = Debt + Equity Value / Equity = Debt / Equity + Equity / Equity Value / Equity = 0.40 + 1 Equity / Value = 1 / 1.40 = 0.714285714 Debt / Value = 1 – Equity / Value (or Debt/Value) Debt / Value = 0.285714286 WACC = ( 0.714285714 )(
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Unformatted text preview: 0.16 ) + ( 0.285714286 )( 0.08 )(1 – 0.30 ) = ( 0.714285714 )( 0.16 ) + ( 0.285714286 )( 0.08 )( 0.70 ) = 0.130285714 , WACC = 13.03% 7 - 10. Book Value of Common Stock = (6,000,000 ) (1.00 ) = 6,000,000 Book Value of first bond = 50,000,000 Book Value of second bond = 25,000,000 Total Book Value of firm = 6,000,000 + 50,000,000 + 25,000,000 = 81,000,000 7 . Weight of Common Stock = 6,000,000 / 81,000,000 = 7.41% 8 . Weight of bonds = ( 50,000,000 + 25,000,000 ) / 81,000,000 = 92.59% . Market Value of Common Stock = ( 6,000,000 ) ( 20.00 ) = 120,000,000 Market Value of first bond = ( 50,000,000 ) ( 1.10 ) = 55,000,000 Market Value of second bond = ( 25,000,000 ) ( 0.95 ) = 23,750,000 Total Market Value of firm = 120,000,000 + 55,000,000 + 23,750,000 = 198,750,000 9 . Weight of Common Stock = 120,000,000 / 198,750,000 = 60.38% 10 . Weight of bonds = 78,750,000 / 198,750,000 = 39.62%...
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