fin455opthw

# fin455opthw - Ashley Stephens FIN 455 Financial Management...

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Ashley Stephens FIN 455 Financial Management 5 May 2011 Optional Homework Problem 1 1. Rollins’ component cost of debt: Bond sells at part of \$1,000, its YTM and Coupon Rate (12%) are equal. Therefore, the before-tax cost of debt is 12%. The after-tax cost of debt equals: 12%(1-.40)= 7.2% Or Bond Calculations Inputs: N= 40 (2*20); PV= -1000; PMT = 60; FV= 1,000 Outputs: I= 6% Kd= 6%*2= 12% Kd(1-T)= 12%(.6) = 7.2% 2. Cost of preferred stock (Kps) Kps= 12/100(.95)= 12.6% 3. Cost of common stock: CAPM Cost of retained earnings (CAPM approach) r s = r f + (R m -R f ) R s = 10% + 1.2(5%) = 16% 4. Cost of common stock: DCF approach R s = D 0 (1+g) + g P 0 = 2(1.08)/\$27 +.08 = 16% 5. Cost of common stock: bond yield-plus-risk-premium approach R s = r d + bond risk premium 7.2% = 7.2% +4% = 11.2% 6. WACC = W d R d (1-T) + W ps R ps +W e R s = .2(12%)(.6) + .2(12.6%) + .6(16%) = .1356 = 13.56%

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Problem 2 Market value of common equity= \$60 per share * 1 million shares = \$60 million Market value of short term debt = (10 million * 10%)/10% = \$10 million Since the interest rate and discount rate are the same, the face value will be the same as market value MV of bond = Interest/discount rate * (1-1/(1+discount rate) t ) + face value/(1+discount
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fin455opthw - Ashley Stephens FIN 455 Financial Management...

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