财务管理Exercises

Exercises (Chapter 9&10)

1.Y ou are given the following information for Lorelei Motorwerke.

long-term debt outstanding $300000

current yield to maturity 8%

number of shares of common stock 10000

price per share $50

book value per share $25

expected rate of return on stock 15%

(1)Calculate Lorelei’s company cost of capital. ignore taxes

(2)How would expected rate of return on stock and cost of capital

change if Lorelei’s stock price fell to $25 due to declining profits?

Business risk is unchanged.

2.Equity beta of Burlington Northern is 0.64, standard error is 0.2. And

the industry equity beta is 0.5, standard error is 0.17.

(1)Calculate Burlington’s cost of equity from the CAPM using its own

beta estimate and the industry beta estimate. How different are your answers? Assume a risk-free rate of 3.5 percent and a market risk premium of 8 percent.

(2)Can you be confident that Burlington’s true beta is not the industry

average?

(3)Under what circumstances might you advise Burlington to

calculate its cost of equity on its own beta estimate?

(4)Burlington’s cost of debt was 6 percent and its debt-to-value ratio

was 0.4. What was Burlington’s company cost of capital? Use the industry average beta.

3.Amalgamated Products has three capital for each division,

Amalgamated has identified the following three principal competitors: division percentage of firm value

food 50

electronic 30

chemicals 20

To estimate the cost of capital for each division, Amalgamated has identified the following three principal competitors:

beta equity debt/value United foods 0.8 0.3

General Electronics 1.6 0.2

Associated Chemicals 1.2 0.4 Assume these beta are accurate estimates and that the CAPM is correct.

(1)assuming that the debt of these firms is risk-free, estimate the asset

beta for each of Amalgamated’s divisions

(2)Amalgamated’s ratio of debt to value is 0.4. if your estimates of

divisional betas are right, what is Amalgamated’s equity beta? (3)Assume that the risk free interest rate is 7 percent and that the

expected return on the market index is 15 percent. Estimate the cost of capital for each of Amalgamated ’s divisions.

(4) how much would your estimates of each division ’s cost of capital change if you assumed that debt has a beta of 0.2?

4. Otobai cash flow as follows,

Now it is considering another production method for its electric scooter. It would require an additional investment of $15 but would reduce variable costs by $40000 per unit.

(1) what is the NPV

(2) draw break even charts for this scheme

(3) explain how you would interpret the break-even figure.

now suppose Otobai ’s management would like to know the figure for variable cost per unit at which the electric scooter project would break even. calculate the level of costs at which the project would earn zero 315-Flow Cash Net 3.0flow cash Operating 1.5after tax Profit 1.550% @ .Taxes 3profit Pretax 1.5on Depreciati 3Costs Fixed 30Costs Variable 37.5Sales 15-Investment 10

-1 Years 0Year

profit and at which it would have zero NPV.

5.An auto plant that costs $100 million to build can produce a new line

of cars that will generate cash flows with a present value of $140 million if the line is successful, but only $50 million if it is unsuccessful. Y ou believe that the probability of success is only about 50%.

(1)would you build the plant

(2)suppose that the plant can be sold for $90 million to another

automaker if the line is not successful . now would you build the plant?

(3)illustrate this option to abandon using a decision tree.