Solution to Practice Problems

Solution to - HAAS SCHOOL OF BUSINESS UNIVERSITY OF CALIFORNIA AT BERKELEY UGBA 103 AVINASH VERMA SOLUTION TO PRACTICE PROBLEMS 1 XYZ Company is

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
H AAS S CHOOL OF B USINESS U NIVERSITY OF C ALIFORNIA AT B ERKELEY UGBA 103 A VINASH V ERMA S OLUTION TO P RACTICE P ROBLEMS 1. XYZ Company is considering its first and only project. Therefore, we shall be using value of the firm interchangeably with the value of the project. This project calls for an investment of $135 million. Suppose this amount has been raised and is at present held as cash. Therefore, before the project the value of assets is $135,000,000. Now, suppose the project is expected to generate sales of $90,000,000 per year. Annual cash costs account for 64% of the sales. For computational ease, these annual sales, costs, and, therefore income, are assumed to occur in perpetuity. Now, suppose we are further given that the corporate profits are taxed at 32%, and that if this project were undertaken by an all-equity firm, its cost of capital would be 13.5%. [That is, r UA = 13.5%.]. The firm has a target debt-to assets ratio of five-eighth, and expects to issue debt at 9% per year. Value the levered firm by both APV and WACC method and show that the two methods yield the same answer. Annual Costs = 0.64*Annual Sales = 0.64*$90m = $57.6m
Background image of page 1

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

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 02/12/2012 for the course UGBA 101A taught by Professor Mccullough during the Spring '08 term at University of California, Berkeley.

Page1 / 2

Solution to - HAAS SCHOOL OF BUSINESS UNIVERSITY OF CALIFORNIA AT BERKELEY UGBA 103 AVINASH VERMA SOLUTION TO PRACTICE PROBLEMS 1 XYZ Company is

This preview shows document pages 1 - 2. Sign up to view the full document.

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