Week 13
solutions to the tutorial questions
Chapter 29
QP 29.2; 29.4; 29.6; 29.7; 29.12
2. a) Since neither company has any debt, using the pooling method, the
asset value of the combined firm must equal the value of the equity, so:
Assets = Equity = 26,0
Week 12 tutorial question solutions
Chapter 23: CQ 23.7;
7. Your colleague is correct, but the fact that an increased
volatility increases the value of an option is an important part
of option valuation. All else the same, a call option on a
venture that
Week 11 tutorial question solutions
Chapter 22: CQ 22.14; 22.15;
CQ 22.14. The equity holders of a firm financed partially with debt can
be thought as holding a call option on the assets of the firm with a
strike price equal to the debts face value and a
Week 10 tutorial question solutions
Chapter 21: CQ 21.4;
4. a. Leasing is a form of secured borrowing. It reduces a firms cost
of capital only if it is cheaper than other forms of secured
borrowing. The reduction of uncertainty is not particularly
relevan
QP 18.1;
1. a. The maximum price that the company should be willing to pay
for the fleet of cars with all-equity funding is the price that makes
the NPV of the transaction equal to zero. The NPV equation for
the project is:
NPV = Purchase Price + PV[(1 tC
Chapter 17: CQ 17.5;
5. Modigliani and Millers theory with corporate taxes indicates that,
since there is a positive tax advantage of debt, the firm should
maximize the amount of debt in its capital structure. In reality,
however, no firm adopts an all-de
Week 7 Tutorial question solutions
Chapter 16:
QP 16. 14. a.
The value of the unlevered firm is:
V = EBIT(1 tC)/R0
V = $140,000(1 .35)/.17
V = $535,294.12
b. The value of the levered firm is:
V = V U + tC B
V = $535,294.12 + .35($135,000)
V = $582,544.12
Week 6
CHAPTER 14
CQ 14. 10.
a. If the market is not weak form efficient, then this information could be acted
on and a profit earned from following the price trend. Under (2), (3), and
(4), this information is fully impounded in the current price and no
033Tutorial solutions week 5
CHAPTER 13
CQ 13. 4. Two primary advantages of the SML approach are that the
model explicitly incorporates the relevant risk of the stock and the
method is more widely applicable than is the DCF model, since the
SML doesnt mak
Tutorial Solutions week 4
CQ 11.8. If we assume that the market has not stayed constant during
the past three years, then the lack in movement of Southern Co.s
stock price only indicates that the stock either has a standard
deviation or a beta that is ver
Tutorial solutions Week 3
Chapter 7
QP 7.1. a. To calculate the accounting breakeven, we first need to find
the depreciation for each year. The depreciation is:
Depreciation = $724,000/8
Depreciation = $90,500 per year
And the accounting breakeven is:
QA
Solutions to Tutorial week 2
Chapter 5
CQ 5.4.
For a project with future cash flows that are an annuity:
Payback = I / C
And the IRR is:
0 = I + C / IRR
Solving the IRR equation for IRR, we get:
IRR = C / I
Notice this is just the reciprocal of the paybac