Chapters 9 & 10 Solutions

Chapters 9 & 10 Solutions - Chapters 9...

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Unformatted text preview: Chapters 9 & 10 Solutions 9-9 Enter these values: N = 60, PV = -515.16, PMT = 30, and FV = 1000, to get I = 6% = periodic rate. The nominal rate is 6%(2) = 12%, and the after-tax component cost of debt is 12%(0.6) = 7.2%. 9-10 a. r s = 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%. d. The bond-yield-plus-judgmental-risk-premium approach and the CAPM method both resulted in lower cost of equity values than the DCF method. The firm's cost of equity should be estimated to be about 15.9%, which is the average of the three methods. 9-11 a. $6.50 = $4.42(1+g) 5 (1+g) 5 = $6.50/$4.42 = 1.471 (1+g) = 1.471 (1/5) = 1.080 g = 8%. Alternatively, with a financial calculator, input N = 5, PV = -4.42, PMT = 0, FV = 6.50, and then solve for I/YR = 8.02% 8%. b. D 1 = D (1 + g) = $2.60(1.08) = $2.81. c. r s = D 1 /P + g = $2.81/$36.00 + 8% = 15.81%. 9-12 a. r s = 1 P D + g 0.09 = 00 . 60 $ 60 . 3 $ + g 0.09 = 0.06 + g g = 3%. b. Current EPS $5.400 Less: Dividends per share 3.600 Retained earnings per share $1.800 Rate of return 0.090 Increase in EPS $0.162 Current EPS 5.400 Next year's EPS $5.562 Alternatively, EPS 1 = EPS (1 + g) = $5.40(1.03) = $5.562. 9-13 P = $30; D 1 = $3.00; g = 5%; F = 10%; r s = ? r s = [D 1 /(1 - F) P ] + g = [$3/(1 - 0.10)($30)] + 0.05 = 16.1%. 9-14 Enter these values: N = 20, PV =1,000(1 - 0.02) = 980, PMT = -90(1 - 0.4) = -54, and FV = -1000, to get I/YR = 5.57%, which is the after-tax component cost of debt....
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This note was uploaded on 02/27/2012 for the course BUS 510 taught by Professor Mehdi during the Spring '11 term at University of La Verne.

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Chapters 9 & 10 Solutions - Chapters 9...

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