Solutions to Additional Problems Capital Structure
a. Annual tax savings from debt = $ 40 million * .09 * .35 = $ 1.26
b. PV of Savings assuming savings are permanent = $ 40 million .35 = $ 14.00
c. PV of Savings assuming savings occur for 10 years = $
Solutions to Stock and Bond Problems
1. Since the coupons are going to be reduced by half they will be $50 for the next three years.
The final payment will be the remaining unpaid coupons of $150, plus the last coupon of
$100 plus the face value of $1,000
Solutions to Time Value Problems
There is some notation that I want to point out. Rather than write out the formula for an annuity
the book, and I, will use some shorthand notation. Atr% =
t is the present value of
r r (1 + r )
a $1 annuity discoun
Valuation Problem Solution
1. a. Beta for the Health Division = 1.15. Cost of Equity = 7% + 1.15 * 5.5% = 13.33%. Cost of Capital
= 13.33% * 0.80 + (7.5% * 0.6) * 0.2 = 11.56%.
b. The table below contains the FCF calculations.