Chapter 8 Questions

Sample Answer

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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Question

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

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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