Chapter 8 Questions

Chapter 8 Questions

Question 1

1a Book Value Debt /Equity = Book Value of Debt /Book Value of Equity     Book value of debt Book value of equity D/E     2500 2500 1         Shares Outstanding Market Price Market Value of Equity   50  $                                80.00  $                       4,000.00   Rate Face value of a bond Market Value of BBBBBBBBBBBBBond   0.8  $                           2,500.00  $                       2,000.00   Market Value( Debt/ Equity 0.5
1b Book value debt ratio = BV of debt/BV of DEBT + BV of equity   BV of debt BV of debt BV of equity    $                        2,500.00  $                           2,500.00  $                       2,500.00 0.5     Market Value debt ratio= MV of debt + Mv of equity   The market value of debt Market value of debt The more the market value of equity    $                        2,000.00  $                           2,000.00 4000 0.333333333
1c After tax cost of debt = cost of debt*(1-t)   Bond yield tax rate   12% 0.4 0.072       1d Cost of Equity= Rf+ B(E(RM)-RF) Risk-free rate beta E(Rm- Rf) Cost of Equity 0.08 1.2 0.055 0.146

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Question 2 

Question 2
2a.	Market Value Debt to equity ratio	Initial Investment	Initial equity in investment for the project.
	0.6667	$                                            100.00	$                                                        66.67
2b	Cashflows to equity = net income + depreciation
		Net income	Depreciation	Cashflows to equity
		9.6	5	14.6
	NPV of CF to equity
	Cashflow to Equity	The initial investment in the project	NPV of CF to equity
	$                                                                     14.60	$                                              66.67	33.33

Question 6

Question 6 6(a) Current beta Tax rate Debt 1 Debt 2 Unlevered beta 1.15 0.4  $                  500,000.00  $  2,000,000.00 0.1796875 6(b) Debt The current cost of equity Cost of equity (debt 1) Growth rate Increase in firm value.  $              2,500,000.00 0.1106 0.1087 0.02  $                   53,551.30 Increase in firm value. Shares outstanding Increase in stock price  $                    53,551.30 100,000  $                             0.54

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Week 7 Chapter 8 Questions

Select three formula-driven problems from Chapter 8 that you wish to showcase and prepare a Microsoft Excel document showing the Excel formulas used to prepare the solution for those problems.

REMINDER: Part of the great you receive on your problems is the utilization of Formulas. Therefore, do not issue less that only requires a narrative!