Assignment#2

Chapter 13

Problem#1

An all-equity firm produced a dividend flow of $20,000 last year. The market value of the firm is $650,000 and the dividend is expected to increase at 4% each year.

What is the cost of equity capital for this firm?

Problem#2

The outstanding debt of BRS Corp. has five years to maturity, a current yield of 6%, and a price of $95. Assume the debt has a face value of $100.

What is the pretax cost of debt if the tax rate is 30%?

Problem#3

How much cash flow before tax and interest is necessary to support a project that requires $4 million annually for equity investors and $2 million annually in interest payments if the firm’s tax rate is 35%?

Problem#4

A company has a capital structure with debt and equity:

Debt – $50 million face value bonds maturing in 15 years with a coupon rate of 4% paid semi-annually. Similar bonds are selling at 96.

Equity – There are 2,000,000 shares outstanding. The investor’s return is 12%. The next dividend is $3.5 with a growth rate of 4% into the future. Tax rate is 35%.

Given the following information, calculate its WACC.

Chapter 16

Problem#4

A firm requires an investment of $20,000 and will return $26,500 after one year. If the firm borrows $5,000 at 7% what is the return on levered equity?

Problem#5

Consider two firms, With and Without, that have identical assets that generate identical cash flows. Without is an all-equity firm, with 1 million shares outstanding that trade at a price of $24 per share. With has 2 million shares outstanding and $12 million of debt at an interest rate of 5%.

According to MM Proposition I, What is the stock price for With ?

Problem#6

A company has no debt and is all equity financed. The company’s securities value is $390,000 and EBIT is 90,000. Tax rate is 35%. The company can borrow at 9%.

a. Calculate the firms required return on equity given zero level of debt.

b. What is the company’s required rate of return on assets?

c. If the company borrows $100,000 and uses the proceeds to repurchase shares what is the new levered value of the company?

d. What is the new value of equity after the leverage?

e. What is the new cost of equity after the leverage?

f. What is the new WACC?

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