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

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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%.
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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 
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