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UMUC Solution 4.4 and 5.5 HW Session 4

# UMUC Solution 4.4 and 5.5 HW Session 4 - PROBLEM 4-4 Given...

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PROBLEM 4-4 Given December 31, 2006 Liabilities and Owner's Capital Current liabilities Accounts payable \$8,250,000 Notes payable - - Other current liabilities` 7,266,000 Total current liabilities \$15,516,000 \$- \$420,000,000 \$434,091,171 Total liabilities \$435,516,000 \$434,091,171 Owners' capital \$40,000,000 Paid-in-capital 100,025,000 Accumulated earnings 255,000,000 Total owners' capital \$395,025,000 \$900,000,000 Total liabilities and owners' capital \$830,541,000 \$1,334,091,171 Capital Market Data Treasury Bond Yield 5.42% Market Risk Premium 5.00% Unlevered equity beta (SIC 4924) 0.90 Stock price \$22.50 Market capitalization \$900,000,000 Yield on debt 8.00% Bond beta 0.30 Short-term interest bearing debt \$- New long-term debt total \$- Tax Rate 40.00% Solution Step 1: Evaluate the capital structure weights \$1,320,000,000 Debt / Enterprise Value 32.89% Equity / Enterprise Value 67.11% Step 2: Estimate the costs of Financing Debt (after taxes) 4.80% Equity 10.76% Levered equity beta 1.07

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UMUC Solution 4.4 and 5.5 HW Session 4 - PROBLEM 4-4 Given...

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