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To complete the homework assignments in the templates provided:
1. The question is provided for each problem. You may need to refer to your textbook
2. You will enter the required information into the shaded cells.
3. The cells are coded:
a) T requires a text answer. Essay questions require references
d) Formula requires a written formula, not the numbers. For example, the rate of re
(debt) + E (equity) = V (value).
Instructions
ded cells.
r functions. You cannot perform the operation on a calculator and then type the
the cell, and only the final answer will show in the cell. I will be able to review
Instructions: Please refer to your book for assistance with your homework. Post your work
in the worksheet. Highlight your final answer.
Problem 9-2
A company is 40% financed by risk-free debt. The interest rate is 10%, the expected market risk premium is 8%, a
the companys common stock is .5.
a.
b.
Interest Rate
40%
10%
8%
Answers:
Step 1:
r(d)=
r(e)=
D/V
E/V
10%
14%
40%
60%
Step 2:
a.
b.
Cost of Capital
WACC
Instructions: Please refer to your book for assistance with your homework. Post your work
in the worksheet. Highlight your final answer.
Beta
Taxes
0.5
35%
at a 35% rate?
TIP: D + E = V
Calculation
12.4%
11%
Instructions: Please refer to your book for assistance with your homework. Post your work
in the worksheet. Highlight your final answer.
Problem 9-16
What types of firms need to estimate industry asset betas? How would such a firm make the estimate? Describe
Answer:
What types of firms need to estimate industry asset betas?
According to Brealey, Myers, and Allen (2011), there are certain types of firms which would benefit fro
betas, which is a means of direct project risk measurement. Firms which are considering new investmen
want to asses the risk of this investment and would need to know the asset beta of the industry of that ve
one which wants to set a cost of capital for a specific line of business and would need to estimate the ave
References
Brealey, R.A., Myers, S.C., & Allen, F. (2011). Principles of corporate finance (10th ed.). Boston, MA:
How would such a firm make the estimate? Describe the process step by step.
According to Brealey, Myers, and Allen (2011), the average risk estimate can be calculated using the ass
calculate the asset beta, the Beta of Debt are multiplied by the Debt to Value Ratio. Then, the Beta of Eq
Ratio are multiplied and are added to the figures previously mentioned.
References
Brealey, R.A., Myers, S.C., & Allen, F. (2011). Principles of corporate finance (10th ed.). Boston, MA:
Instructions: Please refer to your book for assistance with your homework. Post your work
in the worksheet. Highlight your final answer.
Instructions: Please refer to your book for assistance with your homework. Post your work
in the worksheet. Highlight your final answer.
Problem 10-2
Explain how each of the following actions or problems can distort or disrupt the capital budgeting process.
a. Overoptimism by project spon
b. Inconsistent forecasts of industry and macroeconomic variables.
c. Capital budgeting organized solely as a bottom-up process.
Answer:
a.
b.
c.
According to Brealey, Myers, and Allen (2011) capital budgeting which is org
process can negatively impact the capital budgeting process. Lower leven ma
identify all of the projects which may be worthwhile because they are only sin
considering projects from the bottom-up would cause many tasks to be overlo
loss of profitability or loss of potential to increase profitability.
References
Brealey, R.A., Myers, S.C., & Allen, F. (2011). Principles of corporate financ
McGraw-Hill Irwin.
References
Brealey, R.A., Myers, S.C., & Allen, F. (2011). Principles of corporate financ
McGraw-Hill
Irwin. with your homework. Post your work
Instructions: Please refer to your book
for assistance
in the worksheet. Highlight your final answer.
Instructions: Please refer to your book for assistance with your homework. Post your work
in the worksheet. Highlight your final answer.
Instructions: Please refer to your book for assistance with your homework. Post your work
in the worksheet. Highlight your final answer.
Instructions: Please refer to your book for assistance with your homework. Post your work
in the worksheet. Highlight your final answer.
Problem 10-14
Suppose that the expected variable costs of Otobais project are 33 billion a year and that fixed costs are zero.
a. How does this change the degree of operating le
b. Now recompute the operating leverage assuming that the entire 33 billion of
Answers:
See page 243, Table 10.1, of textbook for additional information. Copy is also provided below.
Fixed Costs
a.
DOL Formula
1+(Fixed cost + depreciation)/ operating profit
b.
$33,000,000,000
$0
Instructions: Please refer to your book for assistance with your homework. Post your work
in the worksheet. Highlight your final answer.
so provided below.
Calculation
1.5
12.5