3331 ch 10 sol

3331 ch 10 sol - Solutions to End-Of-Chapter Problems 10-1...

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Unformatted text preview: Solutions to End-Of-Chapter Problems 10-1 r d (1 – T) = 0.12(0.65) = 7.80%. 10-2 P p = $47.50; D p = $3.80; r p = ? r p = p p P D = 50 . 47 $ 80 . 3 $ = 8%. 10-3 40% Debt; 60% Common equity; r d = 9%; T = 40%; WACC = 9.96%; r s = ? WACC = (w d )(r d )(1 – T) + (w c )(r s ) 0.0996 = (0.4)(0.09)(1 – 0.4) + (0.6)r s 0.0996 = 0.0216 + 0.6r s 0.078 = 0.6r s r s = 13%. 10-4 P = $30; D 1 = $3.00; g = 5%; r s = ? a. r s = 1 P D + g = 00 . 30 $ 00 . 3 $ + 0.05 = 15%. b. F = 10%; r e = ? r e = ) F 1 ( P D 1- + g = ) 10 . 1 ( 30 $ 00 . 3 $- + 0.05 = 00 . 27 $ 00 . 3 $ + 0.05 = 16.11%. 10-5 Projects A, B, C, D, and E would be accepted since each project’s return is greater than the firm’s WACC. 10-6 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%. Chapter 10: The Cost of Capital Answers and Solutions 1 c. r s = Bond rate + Risk premium = 12% + 4% = 16%. d. Since you have equal confidence in the inputs used for the three approaches, an average of the three methodologies probably would be warranted. r s = 3 % 16 % 4 . 15 % 3 . 16 + + = 15.9%. 10-7 a. r s = 1 P D + g = 36 $ 18 . 3 $ + 0.06 = 14.83%. b. F = ($36.00 – $32.40)/$36.00 = $3.60/$36.00 = 10%. c. r e = D 1 /[P (1 – F)] + g = $3.18/$32.40 + 6% = 9.81% + 6% = 15.81%. 10-8 Debt = 40%, Common equity = 60%. P = $22.50, D = $2.00, D 1 = $2.00(1.07) = $2.14, g = 7%. r s = 1 P D + g = 50 . 22 $ 14 . 2 $ + 7% = 16.51%. WACC= (0.4)(0.12)(1 – 0.4) + (0.6)(0.1651) = 0.0288 + 0.0991 = 12.79%. 10-9 Capital Sources Amount Capital Structure Weight Long-term debt $1,152 40.0% Common Equity 1,728 60 .0 $2,880 100 .0 % WACC= w d r d (1 – T) + w c r s = 0.4(0.13)(0.6) + 0.6(0.16) = 0.0312 + 0.0960 = 12.72%. 10-10 If the investment requires $5.9 million, that means that it requires $3.54 million (60%) of common equity and $2.36 million (40%) of debt. In this scenario, the firm would exhaust its $2 million of retained earnings and be forced to raise new stock at a cost of 15%. Needing $2.36 million in retained earnings and be forced to raise new stock at a cost of 15%....
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3331 ch 10 sol - Solutions to End-Of-Chapter Problems 10-1...

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