5] (35 points) CAPITAL BUDGETING Solution
Gabbys Industries is considering replacing a piece of equipment with a newer model. The existing equipment has a
remaining life of 5 years and has a current book value of $16. It is being depreciated over its rema
X - Problems
Fall 08 - Spring 09
[3] (35 points) TIME VALUE OF MONEY Solution Starting today (October 2, 2007) Gabby makes the first of 6
deposits of $D into an account that is expected to pay 20% annual interest through October 2, 2009 before declining
t
[1] (30 points) EFFECTIVE RATES Solution Gabby needs to borrow $50,000 for 5 years immediately and she has
three choices: First National Bank charges an APR of 6% a year and requires equal monthly payments for 5 years.
The local loan shark requires daily
17.2
The adjusted present value of a project equals the net present value of the project
under all-equity financing plus the net present value of any financing side effects. In
Geminis case, the NPV of financing side effects equals the after-tax present v
The adjusted present value (APV) of a project equals the net present value of the project if it
were funded completely by equity plus the net present value of any financing side
effects. In Hertzs case, the NPV of financing side effects equals the after-t
Chapter 17: Valuation and Capital Budgeting for the Levered Firm
17.1
a.
17.7
a.
Bolero has a capital structure with three parts: long-term debt, short-term debt, and equity.
i.
Book Value Weights:
Type of Financing
Long-term debt
Short-term debt
Common S
The adjusted present value of a project equals the net present value of the project under all-equity
financing plus the net present value of any financing side effects.
According to Modigliani-Miller Proposition II with corporate taxes:
rS = r0 + (B/S)(r0
In a world with corporate taxes, a firms weighted average cost of capital (r wacc) is equal to:
rwacc
= cfw_B / (B+S)(1 TC) rB + cfw_S / (B+S)rS
where
B / (B+S) = the firms debt-to-value ratio
S / (B+S) = the firms equity-to-value ratio
rB = the pre-tax c
Bolero has a capital structure with three parts: long-term debt, short-term debt, and equity.
i.
Book Value Weights:
Type of Financing
Long-term debt
Short-term debt
Common Stock
Total
Book Value
$5,000,000
$5,000,000
$10,000,000
$20,000,000
Weight
25%
25
In order to determine the cost of the firms debt (rB), solve for the discount rate that makes the
present value of the bonds future cash flows equal to the bonds current price.
Since WWIs one-year, $1,000 par value bonds carry a 7% coupon, bond holders wi
15
a.
The equity beta of a firm financed entirely by equity is equal to its unlevered beta.
Find each of the firms equity betas, given an unlevered beta of 1.2.
North Pole
Equity = [1 + (1-TC)(B/S)]Unlevered
where
Equity
Unlevered
TC
B
S
= the equity beta
What Macroeconomics
Tries to Explain
Eco 1 Fall 2014
Class 16 October 27th
Professor Maria Figueroa-Armijos
Microeconomics
Macroeconomics
Macroeconomics answers
questions about
The overall level of economic activity
Our standard of living
The percentag
Chapter 20 The classical Long-Run model
1. List two reasons why the classical model remains useful today.
1) Overthelastseveraldecades,therehasbeenanactivecounterrevolution
againstKeynessapproachtounderstandingthemacroeconomy.
2) *Itremainsthebestmodelfor
Chapter 19 The Price Level and Inflation
1. Describe how index numbers are calculated.
2. Discuss how the Consumer Price Index (CPI) is compiled and how it
is used.
-The most widely used measure of the price level in the United States is the Consumer
Pric
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4-37
A father is planning a savings program to put his daughter through
college. His daughter is now 13 years old. She plans to enroll at the
university in five years, and it should take her four years to
complete her education. Currently, the cost per y
Two main reason why, for a given firm, debt is a cheaper source of funds than equity.
1.
The tax deductibility of interest on bonds.
2.
Yields on bonds are less than yields on stocks. From the point of view of an investor,
owning a bond is safer than owni
11-2
The McDaniel Companys financing plans for the next year include the sale
of long-term bonds with a 10% coupon. The company believes it can sell
the bonds at a price that will provide a yield to maturity of 12%. If the
marginal tax rate is 34%, what i
1. BOND VALUATION
Suppose Ford Motor Company sold an issue of bonds with
a 10 year maturity, a $1,000 par value, a 10 percent coupo
n rate, and
semiannual interest payments.
(a) Two years after the bonds were issued, the going rate o
f interest on bonds s
1. BOND VALUATION
Suppose Ford Motor Company sold an issue of bonds with
a 10 year maturity, a $1,000 par value, a 10 percent coupo
n rate, and
semiannual interest payments.
(a) Two years after the bonds were issued, the going rate o
f interest on bonds s