Sem 2 2011 FINS3641 Sol Week 4

Sem 2 2011 FINS3641 Sol Week 4 - FINS3641 SECURITY ANALYSIS...

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

View Full Document Right Arrow Icon
FINS3641 Tutorial Solutions: Peter Andersen, Eileen Kang FINS3641: Security Analysis and Valuation- Week 4 Solutions 1 FINS3641: S ECURITY A NALYSIS AND V ALUATION Week 4 Solutions CHAPTER IX —PROBLEM 1 Derra Foods reports $1 billion in book value of equity and has no debt, but it uses operating leases for all of its stores. Its most recent payment was $85m, with future operating lease commitments of: • $90m in years 1 and 2. • $85m in year 3. • $80m in years 4 and 5. • $75m in years 6 through 10. The company has a borrowing cost of 7% annually. Estimate both the debt value of operating leases and the book value debt/equity ratio. We capitalise the future operating lease expenses by taking their present value using the present cost of debt: Year 1 2 3 4 5 6 7 8 9 10 Lease Expense 90 90 85 80 80 75 75 75 75 75 PV of Lease Expense 84.11 78.61 69.39 61.03 57.04 49.98 46.71 43.65 40.80 38.13 Sum of Present Values 569.43 $569.43 million is the debt value of the operating leases. With $1,000 million of equity, the debt-to-equity ratio is: 569.43/1000 or 0.56943
Background image of page 1

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

View Full Document Right Arrow Icon
FINS3641 Tutorial Solutions: Peter Andersen, Eileen Kang FINS3641: Security Analysis and Valuation- Week 4 Solutions
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

Page1 / 6

Sem 2 2011 FINS3641 Sol Week 4 - FINS3641 SECURITY ANALYSIS...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online