ch10solutions

# ch10solutions - 101 rd(1T)=0.12(0.65)=7.80 102...

This preview shows pages 1–3. Sign up to view the full content.

Solutions to End-Of-Chapter Problems 10-1 r d (1 – T) = 0.12(0.65) = 7.80%. 10-2 P p  = \$47.50; D p  = \$3.80; r p  = ? r p p p P D  =  50 . 47 \$ 80 . 3 \$  = 8%. 10-3 40% Debt; 60% Common equity; r d  = 9%; T = 40%; WACC = 9.96%; r s  = ? WACC = (w d )(r d )(1 – T) + (w c )(r s ) 0.0996 = (0.4)(0.09)(1 – 0.4) + (0.6)r s 0.0996 = 0.0216 + 0.6r s 0.078 = 0.6r s r s = 13%. 10-4 P 0  = \$30; D 1  = \$3.00; g = 5%; r s  = ? a. r s  =  0 1 P D  + g =  00 . 30 \$ 00 . 3 \$  + 0.05 = 15%. b. F = 10%; r e  = ? r e  =  ) F 1 ( P D 0 1 -  + g ) 10 . 0 1 ( 30 \$ 00 . 3 \$ -  + 0.05 00 . 27 \$ 00 . 3 \$  + 0.05 = 16.11%. 10-5 Projects A, B, C, D, and E would be accepted since each project’s return is greater than the firm’s  WACC. 10-6 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%.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
d. Since you have equal confidence in the inputs used for the three approaches, an average of  the three methodologies probably would be warranted. r s  =  3 % 16 % 4 . 15 % 3 . 16 + +  = 15.9%. 10-7 a. r s 0 1 P D  + g 36 \$ 18 . 3 \$  + 0.06 = 14.83%. b. F = (\$36.00 – \$32.40)/\$36.00 = \$3.60/\$36.00 = 10%. c. r e  = D 1 /[P 0 (1 – F)] + g = \$3.18/\$32.40 + 6% = 9.81% + 6% = 15.81%. 10-8 Debt = 40%, Common equity = 60%. P 0  = \$22.50, D 0  = \$2.00, D 1  = \$2.00(1.07) = \$2.14, g = 7%. r s  =  0 1 P D  + g =  50 . 22 \$ 14 . 2 \$  + 7% = 16.51%. WACC= (0.4)(0.12)(1 – 0.4) + (0.6)(0.1651) = 0.0288 + 0.0991 = 12.79%. 10-9 Capital Sources Amount Capital Structure Weight Long-term debt \$1,152 40.0% Common Equity   1,728   60     .0     \$2,880 100     .0     % WACC= w d r d (1 – T) + w c r s  = 0.4(0.13)(0.6) + 0.6(0.16) = 0.0312 + 0.0960 = 12.72%. 10-10 If the investment requires \$5.9 million, that means that it requires \$3.54 million (60%) of common  equity and \$2.36 million (40%) of debt.  In this scenario, the firm would exhaust its \$2 million of  retained earnings and be forced to raise new stock at a cost of 15%.  Needing \$2.36 million in
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business â€˜17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. Itâ€™s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania â€˜17, Course Hero Intern

• The ability to access any universityâ€™s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLAâ€™s materials to help me move forward and get everything together on time.

Jill Tulane University â€˜16, Course Hero Intern