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Chapter 8 Questions

Chapter 8 Questions

Sample Answer 

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 bond Market Value of bond
  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
  Market value of debt Market value of debt 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

Question 2 

Question 2
2a. Market Value debt to equity ratio Initial Investement Initial equity in investement fo 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 Initial investement 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 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 Inrease 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.

Chapter 8 Questions

Chapter 8 Questions

REMINDER: Part of the grade that you receive on your problems is the utilization of Formulas. Therefore, do not pick problems that only require a narrative!

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