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Unformatted text preview: Chapters 9 & 10 Solutions 99 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 aftertax component cost of debt is 12%(0.6) = 7.2%. 910 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 bondyieldplusjudgmentalriskpremium 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. 911 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%. 912 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. 913 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%. 914 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 aftertax component cost of debt....
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 Spring '11
 Mehdi
 Management, Debt, Net Present Value, Internal rate of return, cash flow register

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