Chapter 8 Questions
Question 1
| 1a |
Book Value Debt /Equity = Book Value of Debt /Book Value of Equity |
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Book value of debt |
Book value of equity |
D/E |
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2500 |
2500 |
1 |
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Shares Outstanding |
Market Price |
Market Value of Equity |
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50 |
$ 80.00 |
$ 4,000.00 |
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Rate |
Face value of a bond |
Market Value of BBBBBBBBBBBBBond |
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0.8 |
$ 2,500.00 |
$ 2,000.00 |
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Market Value( Debt/ Equity |
0.5 |
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| 1b |
Book value debt ratio = BV of debt/BV of DEBT + BV of equity |
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BV of debt |
BV of debt |
BV of equity |
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$ 2,500.00 |
$ 2,500.00 |
$ 2,500.00 |
0.5 |
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Market Value debt ratio= MV of debt + Mv of equity |
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The market value of debt |
Market value of debt |
The more the market value of equity |
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$ 2,000.00 |
$ 2,000.00 |
4000 |
0.333333333 |
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| 1c |
After tax cost of debt = cost of debt*(1-t) |
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Bond yield |
tax rate |
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12% |
0.4 |
0.072 |
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| 1d |
Cost of Equity= Rf+ B(E(RM)-RF) |
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Risk-free rate |
beta |
E(Rm- Rf) |
Cost of Equity |
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0.08 |
1.2 |
0.055 |
0.146 |
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Question 2
| Question 2 |
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| 2a. |
Market Value Debt to equity ratio |
Initial Investment |
Initial equity in investment for the project. |
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0.6667 |
$ 100.00 |
$ 66.67 |
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| 2b |
Cashflows to equity = net income + depreciation |
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Net income |
Depreciation |
Cashflows to equity |
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9.6 |
5 |
14.6 |
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NPV of CF to equity |
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Cashflow to Equity |
The initial investment in the project |
NPV of CF to equity |
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$ 14.60 |
$ 66.67 |
33.33 |
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Question 6
| Question 6 |
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| 6(a) |
Current beta |
Tax rate |
Debt 1 |
Debt 2 |
Unlevered beta |
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1.15 |
0.4 |
$ 500,000.00 |
$ 2,000,000.00 |
0.1796875 |
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| 6(b) |
Debt |
The current cost of equity |
Cost of equity (debt 1) |
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Growth rate |
Increase in firm value. |
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$ 2,500,000.00 |
0.1106 |
0.1087 |
0.02 |
$ 53,551.30 |
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Increase in firm value. |
Shares outstanding |
Increase in stock price |
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$ 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
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!
