Lecture6 - GM apv question

08x134x614462000011010 58005

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: 5 yrs,14%) = [1­1/(1.1415)]/.14 = 6.1422 NPV(FC) = ­800 + (800/15)x.34x6.1422 = ­$688.6 15 Regular Bond – Interest Tax Shields Two ways to compute: NPV(RB) = + 40,000 – 40,000x.14x(1­.34)x6.1422 ­ 40,000/1.1415 = $11,694.7 OR NPV(RB) = + 40,000x.14x.34x6.1422 = $11,694.7 16 Regular Bond – Total Financing Effect NPV of flotation costs = ­$688.6 NPV of interest tax shields = + $11,694.7 Total NPV of regular bond = + $11,006.1 17 Government-Sponsored Bond The interest rate on the bond is 8%, less than the market rate for govt. bonds with similar characteristics (10%). This bond carries both interest tax shields and a subsidy. A(10 yrs,10%) = [1­1/(1.1010)]/.1 = 6.1446 NPV of govt. sponsored bond = + 20,000 – 20,000x.08x(1­.34)x6.1446 ­ 20,000/1.1010 = $5,800.5 Note that you can’t compute it as before: = + 20,000x.08x.34x6.1446 = $3,342.7 < $5,800.5 Why is this last calculation wrong?? 18 Increase in Financial Distress Costs % of Aa1 firms that enter distress: 6% % of A1 firms that enter distress: 7% Increase in probability of financial distress: 1% Cost of financial distress: 5% of total market value Chrysler’s market value of assets: $10 million Increase in FDC = (.07­.06)x.05x$10,000,000 = $5,000.0 19 Total Financing Side Eff...
View Full Document

This document was uploaded on 03/09/2014 for the course COMM 371 at UBC.

Ask a homework question - tutors are online