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Unformatted text preview: s original analysis and considering only corporate taxes, we have: r* = r (1 – TC L) r* = 0.147 ´ [1 – (0.35 ´ 0.55)] = 0.1187 or approximately 12% This matches the consultant’s estimate for the weightedaverage cost of capital.
15. Disagree. The Banker’s Tryst calculations are based on the assumption that the cost of
debt will remain constant, and that the cost of equity capital will not change even though
the firm’s financial structure has changed. The former assumption is appropriate while the
latter is not. 16. Tax or financing side effects in international projects: Project financing issues, such as early cash flows going to debt service resulting in a
nonconstant debt ratio. Subsidized financing rates. Guaranteed contracts for output. Government restrictions on the flow of funds. 17. a. Y ear
1
2
3
4
5
6
7
8
9
10 Principal at
Start of Year
5000.0
4602.5
4185.1
3746.9
3286.7
2803.5
2296.2
1763.5
1204.2
616.9 Therefore: Principal
Repayment
397.5
417.4
438.2
460.2
483.2
507.3
532.7
559.3
587.3
616.9 Interest
250.0
230.1
209.3
187.3
164.3
140.2
114.8
88.2
60.2
30.8 Interest
Less Tax
162.5
149.6
136.0
121.7
106.8
91.1
74.6
57.3
39.1
20.0 Net Cash
F l ow
On Loan
560.0
567.0
574.2
581.9
590.0
598.4
607.3
616.6
626.4
636.9 Value of subsidy = $5,000,000 $4,530,000 = $470,000 b. Yes. The value of the subsidy measures the additional value to the firm from a
government loan at 5 percent, compared to an unsubsidized loan at 10 percent. Therefore, the company should calculate APV, including
PV (tax shields) on the unsubsidized loan, and then add in the value of subsidy. 18. a. Assume that the expected future Treasurybill rate is equal to the 20year Treasury
bond rate (5.8%) less the average historical premium of Treasury bonds over
Treasury bills (1.8%), so that the riskfree rate (rf) is 4%. Also assume that the
market risk premium (rm – rf) is 8%. Then, using the CAPM, we find rE as follows: rE = rf + bA ´ [rm rf] = 4% + (0.66 ´8%) = 9.28% Market value of e...
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This note was uploaded on 04/26/2013 for the course MATH 289Q taught by Professor Jamesbridgeman during the Fall '04 term at UConn.
 Fall '04
 JAMESBRIDGEMAN
 Math

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