Chapter 13: Risk, Return, and Capital Budgeting
13.4 The pretax cost of debt is the YTM of the company's bonds, so: P0 = $950 = $40 Ar24 + $1,000/(1+r)24 r = 4.339% YTM = (1 + 4.339%)2 1 = 8.87% And the aftertax cost of debt is: rB = 0.0887 (1 0.35) = 0.0
Chapter 16: Capital Structure: Basic Concepts
16.12a. With the information provided, we can use the equation for calculating WACC to find the cost of equity. The equation for WACC is: WACC = (S/V) rS + (B/V) rB (1 tC) The company has a debt-equity ratio o
Chapter 17: Capital Structure: Limits to the Use of Debt 17.1 a. Using M&M Proposition I with taxes, the value of a levered firm is: VL = [EBIT(1 tC)/r0] + tCB VL = [$850,000(1 0.35)/0.14] + 0.35($1,900,000) VL = $4,611,428.57 b. The CFO may be correct. T
Chapter 18: Valuation and Capital Budgeting for the Levered Firm
18.3 a.
In order to value a firm s equity using the flow-to-equity approach, discount
the cash flows available to equity holders at the cost of the firm s levered equity. The cash flows to
e
Chapter 19: Dividends and Other Payouts
19.4 To find the new stock price, we multiply the current stock price by the ratio of old shares to new
shares, so:
a.
$78(3/5) = $46.80
b.
$78(1/1.15) = $67.83
c.
$78(1/1.425) = $54.74
d.
$78(7/4) = $136.50.
To fin
EV = Market Cap + Market Value of Debt - Cash and Cash Equivalents
Where:
EV = Enterprise Value = Firm's overall value (sometimes also referred to as Total Enterprise Value or
TEV)
Market Cap = Market value of equity = Common share price * Common shares o
DeGroote School of Business
MCMASTER UNIVERSITY
BUSINESS F600 Summer 2011
Midterm Exam - Solutions
100 Marks 2.5 Hours
Note: TAs comments are in red.
SOLUTION TO QUESTION 1 [25 Marks]
MARKING KEY:
Deduct 1 mark for not getting CF1 correct in PV55 Earnings
Corporate Finance
Time Value of Money Use of
Financial Calculators
N = number of periods
Remember to clear the registers (CLR TVM) after
each problem
P/Y must equal 1 for the I/Y to be the periodic rate
Interest is entered as a percent, not a decimal
FV