公司理财试卷及答案

4.11 You have the opportunity to make an investment that costs $900,000. If you make this investment now, you will receive $120,000 one year from today, $250,000 and $800,000 two and three years from today, respectively. The appropriate discount rate for this investment is 12 percent.a. Should you make the investment?b. What is the net present value (NPV) of this opportunity?c. If the discount rate is 11 percent, should you invest? Compute the NPV to support your answer.a. The cost of investment is $900,000.PV of cash inflows = $120,000 / 1.12 + $250,000 / 1.122 + $800,000 / 1.123= $875,865.52Since the PV of cash inflows is less than the cost of investment,you should not make the investment.b. NPV = -$900,000 + $875,865.52= -$24,134.48c. NPV = -$900,000 + $120,000 / 1.11 + $250,000 / 1.112 + $800,000 /1.113= $-4,033.18Since the NPV is still negative, you should not make the investment.4.24 Harris, Inc., paid a $3 dividend yesterday. If the firm raises its dividend at 5 percent every year and the appropriate discount rate is 12 percent, what is the price of Harris stock?P = $3 (1.05) / (0.12 - 0.05) = $45.004.25 In its most recent corporate report, Williams, Inc., apologized to its stockholders for not paying a dividend. The report states that management will pay a $1 dividend next year. That dividend will grow at 4 percent every year thereafter. If the discount rate is 10 percent, how much are you willing to pay for a share of Williams, Inc.?P = $1 / (0.1 - 0.04) = $16.674.51 Southern California Publishing Company is trying to decide whether or not to revise its popular textbook, Financial Psychoanalysis Made Simple. They have estimated that the revision will cost $40,000. Cash flows from increased sales will be $10,000 the first year. These cash flows will increase by 7 percent per year. The book will go out of print five years from now. Assume the initial cost is paid now and all revenues are received at the end of each year. If the company requires a 10 percent return for such an investment, should it undertake the revision?The effective annual interest rate is[ 1 + (0.08 / 4) ] 4 – 1 = 0.0824The present value of the ten-year annuity is= $5,974.24PV = 900 10.00824Four remaining discount periodsPV = $5,974.24 / (1.0824) 4 = $4,352.435.13 A common stock pays a current dividend of $2. The dividend is expected to grow at an 8-percent annual rate for the next three years; then it will grow at 4 percent in perpetuity. The appropriate discount rate is 12 percent. What is the price of this stock?Price = $2 (1.08) / 1.12 + $2 (1.082) / 1.122 + $2 (1.083) / 1.123+ {$2 (1.083)(1.04) / (0.12 - 0.04)} / 1.123= $28.895.17 Consider the stock of Davidson Company that will pay an annual dividend of $2 in the coming year. The dividend is expected to grow at a constant rate of 5 percent permanently. The market requires a 12-percent return on the company.a. What is the current price of a share of the stock?b. What will the stock price be 10 years from today?a. P = $2 / (0.12 - 0.05) = $28.57b. P10 = D11 / (r - g)= $2 (1.0510) / (0.12 - 0.05)= $46.54Alternatively, given the answer to part a, P10 = P0(1+g)10 = 28.54(1.05)10 = $46.54.5.20 Allen, Inc., is expected to pay an equal amount of dividends at the end of the first two years. Thereafter, the dividend will grow at a constant rate of 4 percent indefinitely. The stock is currently traded at $30. What is the expected dividend per share for the next year if the required rate of return is 12 percent?$30 = D / 1.12 + D / 1.122 + {D (1 + 0.04) / (0.12 - 0.04)} / 1.122 = 12.053571 DD = $2.495.21 Calamity Mining Company's reserves of ore are being depleted, and its costs of recovering a declining quantity of ore are rising each year. As a result, the company's earnings are declining at the rate of 10 percent per year. If the dividend per share that is about to be paid is $5 and the required rate of return is 14 percent, what is the value of the firm's stock?[Insert before last sentence of question: Assume that dividends are a fixed proportion of earnings.]Dividend one year from now = $5 (1 - 0.10) = $4.50Price = $5 + $4.50 / {0.14 - (-0.10)}= $23.75Since the current $5 dividend has not yet been paid, it is still included in the stock price.5.25 Rite Bite Enterprises sells toothpicks. Gross revenues last year were $3 million, and total costs were $1.5 million. Rite Bite has 1 million shares of common stock outstanding. Gross revenues and costs are expected to grow at 5 percent per year. Rite Bite pays no income taxes, and all earnings are paid out as dividends.a. If the appropriate discount rate is 15 percent and all cash flows are received at year's end, what is the price per share of Rite Bite stock?b. The president of Rite Bite decided to begin a program to produce toothbrushes. The project requires an immediate outlay of $15 million. In one year, another outlay of $5 million will be needed. The year after that, net cash inflows will be $6 million. This profit level will be maintained in perpetuity. What effect will undertaking this project have on the price per share of the stock?a. Price = ($3 - $1.5) 1.05 / (0.15 - 0.05)= $15.75b. NPVGO = -$15,000,000 - $5,000,000 / 1.15 + ($6,000,000 / 0.15) / 1.15= $15,434,783The price increases by $15.43 per share.5.26 California Electronics, Inc., expects to earn $100 million per year in perpetuity if it does not undertake any new projects. The firm has an opportunity that requires an investment of $15 million today and $5 million in one year. The new investment will begin to generate additional annual earnings of $10 million two years from today in perpetuity. The firm has 20 million shares of common stock outstanding, and the required rate of return on the stock is 15 percent.a. What is the price of a share of the stock if the firm does not undertake the new project?b. What is the value of the growth opportunities resulting from the new project?c. What is the price of a share of the stock if the firm undertakes the new project?a. Price = EPS / r= {$100 million / 20 million} / 0.15= $33.33b. NPV = -$15 million - $5 million / 1.15 + ($10 million / 0.15) / 1.15= $38,623,188c. Price = $33.33 + $38,623,188 / 20,000,000= $35.265.27 Suppose Smithfield Foods, Inc., has just paid a dividend of $1.40 per share. Sales and profits for Smithfield Foods are expected to grow at a rate of 5% per year. Its dividend is expected to grow by the same rate. If the required return is 10%, what is the value of a share of Smithfield Foods?Price = 1.40 (1.05) / 0.10 - 0.05Price = $29.405.29 Four years ago, Ultramar Diamond Inc. paid a dividend of $0.80 per share. This year Ultramar paid a dividend of $1.66 per share. It is expected that the company will pay dividends growing at the same rate for the next 5 years. Thereafter, the growth rate will level at 8% per year. The required return on this stock is 18%. According to the discounted dividend model, what would Ultramar's cash dividend be in 7 years?a. $2.86b. $3.06c. $3.68d. $4.30e. $4.82Given D-4 = 0.80; D0 = 1.66=> D-4(1+r)4 = D00.80(1+r)4 = 1.66=> (1+r)4 = 1.66/0.80=> r = (1.66/0.80)0.25 - 1= 0.20020.20.8 1.66 1.66(1.2) 1.66(1.2)2 1.66(1.2)3 1.66(1.2)41.66(1.2)5 1.66(1.2)5 1.66(1.2)5(1.08)(1.08)-4 0 1 2 3 4 5 6 7D7 = 1.66(1.2)5(1.08) 4.82 (choice e)5.30 The Webster Co. has just paid a dividend of $5.25 per share. The company will increase its dividend by 15 percent next year and will then reduce its dividend growthby 3 percent each year until it reaches the industry average of 5 percent growth,after which the company will keep a constant growth, forever. The required rate ofreturn for the Webster Co. is 14 percent. What will a share of stock sell for?5.25(1.15)5.25(1.15)(1.12)(1.12)(1.09)5.25 5.25(1.15) 5.25(1.15)(1.12) 5.25(1.15)(1.12)(1.09) (1.09)(1.06) (1.06)(1.05)Time Cash Flow PV(Cash Flow)=1 6.0375 6.0375/1.14 5.29612 6.762 6.762/(1.14)2 5.203137.37067.3706/(1.14)3 4.974947.81287.8128/(1.14)4 4.6258[7.8128(1.05)/(0.14-0.05)][1/(1.14)4]53.96784PV of growingperpetuityTotal =74.06776.18 Consider the following cash flows of two mutually exclusive projects for Chinese Daily News.a. Based on the payback period rule, which project should be chosen?b. Suppose there is no corporate tax and the cash flows above are income before the depreciation. The firm uses a straight-line depreciation method (i.e., equal amounts of depreciation in each year). What is the average accounting return for each of these two projects?c. Which project has a greater IRR?d. Based on the incremental IRR rule, which project should be chosen?Let project A represent New Sunday Early Edition; and let project B represent New Saturday Late Edition.a. Payback period of project A = 2 + ($1,200 - $1,150) / $450 = 2.11 yearsPayback period of project B = 2 + ($2,100 - $1,900) / $800 = 2.25 yearsBased on the payback period rule, you should choose project A.b. Project A:Average investment = ($1,200 + $0) / 2 = $600Depreciation = $400 / yearAverage income = [($600 - $400) + ($550 - $400) + ($450 - $400)] / 3= $133.33AAR = $133.33 / $600 = 22.22%Project B:Average investment = ($2,100 + $0) / 2 = $1,050Depreciation = $700 / yearAverage income = [($1,000 - $700) + ($900 - $700) + ($800 - $700)] / 3= $200AAR = $200 / $1,050 = 19.05%c. IRR of project A:-$1,200 + $600 / (1 + r) + $550 / (1 + r)2 + $450 / (1 + r)3 = 0IRR = r = 16.76%IRR of project B:-$2,100 + $1,000 / (1 + r) + $900 / (1 + r)2 + $800 / (1 + r)3 = 0IRR = r = 14.29%Project A has a greater IRR.d. IRR of project B-A:Incremental cash flowsYear0123B - A-$900$400$350$350-$900 + $400 / (1 + r) + $350 / (1 + r)2 + $350 / (1 + r)3 = 0Incremental IRR = r = 11.02%If the required rate of return is greater than 11.02%, then choose project A.If the required rate of return is less than 11.02%, then choose project B.6.19 Consider the following cash flows on two mutually exclusive projects that require an annual return of 15 percent. Working in the financial planning department for the Bahamas Recreation Corp., you are trying to compare different investment criteria to arrive at a sensible choice of these two projects.a. Based on the discounted payback period rule, which project should be chosen?b. If your decision rule is to accept the project with a greater IRR, which project should you choose?c. Since you are fully aware of the IRR rule's scale problem, you calculate the incremental IRR for the cash flows. Based on your computation, which project should you choose?d. To be prudent, you compute the NPV for both projects. Which project should you choose? Is it consistent with the incremental IRR rule?Let project A be Deepwater Fishing; let project B be New Submarine Ride.a. Project A:Year Discounted CF Cumulative CF0 -$600,000 -$600,0001234,783-365,2172264,650-100,5673197,255Discounted payback period of project A = 2 + $100,567 / $197,255= 2.51 yearsProject B:Year Discounted CF Cumulative CF0 -$1,800,000 -$1,800,0001869,565-930,4352529,301-401,1343591,765Discounted payback period of project B = 2 + $401,134 / $591,765= 2.68 yearsProject A should be chosen.b. IRR of project A:-$600,000 + $270,000 / (1 + r) + $350,000 / (1 + r)2 + $300,000 /(1 + r)3 = 0IRR = r = 24.30%IRR of project B:-$1,800,000 + $1,000,000 /(1 + r) + $700,000 / (1 + r)2 + $900,000 / (1 + r)3= 0IRR = r = 21.46%Based on the IRR rule, project A should be chosen since it has a greater IRR.c. Incremental IRR:Year0123B - A-$1,200,000$730,000$350,000$600,000-$1,200,000 + $730,000 / (1 + r) + $350,000 / (1 + r)2 + $600,000 /(1 + r)3 = 0Incremental IRR = r = 19.92%Since the incremental IRR is greater than the required rate of return, 15%, choose project B.d. NPV A = -$600,000 + $270,000 / 1.15 + $350,000 / 1.152+ $300,000 / 1.153= $96,687.76NPV B = -$1,800,000 + $1,000,000 / 1.15 + $700,000 / 1.152 + $900,000 / 1.153= $190,630.39Since NPV B > NPV A, choose project B.Yes, the NPV rule is consistent with the incremental IRR rule. 10.3 Mr. Henry can invest in Highbull stock or Slowbear stock. His projection of the returns on these two stocks is as follows:a. Calculate the expected return of each stock.b. Calculate the standard deviation of return of each stock.c. Calculate the covariance and correlation between the two stocks.a. R HB= 0.25 (–2.0) + 0.60 (9.2) + 0.15 (15.4)= 7.33%R SB= 0.25 (5.0) + 0.60 (6.2) + 0.15 (7.4)= 6.08%b. HB2= 0.25 (– 0.02 – 0.0733)2 + 0.60 (0.092 – 0.0733)2+ 0.15 (0.154 – 0.0733)2= 0.003363HB = (0.003363)1/2 = 0.05799 = 5.80%SB2= 0.25 (0.05 – 0.0608)2 + 0.60 (0.062 – 0.0608)2 + 0.15 (0.074 – 0.0608)2= 0.000056SB = (0.000056)1/2 = 0.00749 = 0.75%c. Cov (R HB, R SB)= 0.25 (– 0.02 – 0.0733) (0.05 – 0.0608)+ 0.60 (0.092 – 0.0733) (0.062 – 0.0608)+ 0.15 (0.154 – 0.0733) (0.074 – 0.0608)= 0.000425286Corr (R HB, R SB)= 0.000425286 / (0.05799 0.00749)= 0.979110.5 Security F has an expected return of 12 percent and a standard deviation of 9 percent per year. Security G has an expected return of 18 percent and a standard deviation of 25 percent per year.a. What is the expected return on a portfolio composed of 30 percent of security F and 70 percent of security G?b. If the correlation coefficient between the returns of F and G is 0.2, what is the standard deviation of the portfolio?a. R P= 0.3 (0.12) + 0.7 (0.18) = 0.162 = 16.2%b. P 2= 0.32 (0.09)2 + 0.72 (0.25)2 + 2 (0.3) (0.7) (0.09) (0.25) (0.2)= 0.033244P= (0.033244)1/2 = 0.1823 = 18.23%10.33 The expected return on a portfolio that combines the risk-free asset and the asset at the point of tangency to the efficient set is 25 percent. The expected return was calculated under the following assumptions:The risk-free rate is 5 percent.The expected return on the market portfolio of risky assets is 20 percent.The standard deviation of the efficient portfolio is 4 percent.In this environment, what expected rate of return would a security earn if it had a 0.5 correlation with the market and a standard deviation of 2 percent.Market excess return = E(R M) - R f= 20% - 5% = 15%Portfolio excess return = E(R E) - R f= 25% - 5% = 20%Portfolio beta = E = 20% / 15% = 4 / 3E = {Corr(R E, R M) (R E)} / (R M)Therefore,4 / 3 = (1 4%) / (R M)(R M) = 3%Note: Corr(R E, R M) = 1 because this portfolio is a combination of the riskless asset and the market portfolio.For the security with Corr(R S, R M) = 0.5,S = {Corr(R S, R M) (R S)} / (R M)= (0.5 2%) / 3%= 0.3333Thus, E(R S) = 5% + S (15%)= 5% + (0.3333) (15%)= 10%10.34 Suppose the current risk-free rate is 7.6 percent. Potpourri Inc. stock hasa beta of 1.7 and an expected return of 16.7 percent. (Assume the CAPM is true.)a. What is the risk premium on the market?b. Magnolia Industries stock has a beta of 0.8. What is the expected return on the Magnolia stock?c. Suppose you have invested $10,000 in both Potpourri and Magnolia, and the beta of the portfolio is 1.07. How much did you invest in each stock? What is the expected return on the portfolio?a. The risk premium = R M - R fPotpourri stock return:16.7 = 7.6 + 1.7 (R M - R f)R M - R f = (16.7 - 7.6) / 1.7 = 5.353%b. R Mag = 7.6 + 0.8 (5.353) = 11.88%c. X Pot Pot + X Mag Mag = 1.071.7 X Pot + 0.8 (1 - X Pot) = 1.070.9 X Pot = 0.27X Pot = 0.3X Mag = 0.7Thus invest $3,000 in Potpourri stock and $7,000 in Magnolia.R P = 7.6 + 1.07 (5.353) = 13.33%Note: The other way to calculate R P isR P = 0.3 (16.7) + 0.7 (11.88) = 13.33%10.35 Suppose the risk-free rate is 6.3 percent and the market portfolio has an expected rate of return of 14.8 percent. The market portfolio has a variance of 0.0121. Portfolio Z has a correlation coefficient with the market of 0.45 and a variance of 0.0169. According to the CAPM, what is the expected rate of return on portfolio Z? R Z = R f +Z (R M - R f )Z = Cov(R Z , R M ) / M 2 = Corr(R Z , R M ) Z M / M 2= Corr(R Z , R M ) Z / MZ = (0.0169)1/2 = 0.13M = (0.0121)1/2 = 0.11Thus, Z = 0.45 (0.13) / 0.11 = 0.5318 R Z = 0.063 + 0.5318 (0.148 - 0.063) = 0.1082= 10.82%10.36 The following data have been developed for the Durham Company.Variance of market returns _ 0.04326Covariance of the returns on Durham and the market _ 0.0635Suppose the market risk premium is 9.4 percent and the expected return on Treasury bills is 4.9 percent.a. Write the equation of the security market line.b. What is the required return of Durham Company?a. R i = 4.9% +i (9.4%)b. D = Cov(R D , R M ) / M 2 = 0.0635 / 0.04326 = 1.468 R D = 4.9 + 1.468 (9.4) = 18.70%11.2 Suppose a three-factor model is appropriate to describe the returns of a stock. Information about those three factors is presented in the following chart. Suppose this is the only information you have concerning the factors.a. What is the systematic risk of the stock return?b. Suppose unexpected bad news about the firm was announced that dampens the returns by 2.6 percentage points. What is the unsystematic risk of the stock return?c. Suppose the expected return of the stock is 9.5 percent. What is the total return on thisstock?a. Systematic Risk = 0.042(4,480– 4,416) –1.4(4.3%– 3.1%)– 0.67(11.8% –9.5%)= –0.53%b. Unsystematic Risk = – 2.6%c. Total Return = 9.5% – 0.53% – 2.6% = 6.37%12.3 Mitsubishi Inc. is a levered firm with a debt-to-equity ratio of 0.25. The beta of common stock is 1.15, while the beta of debt is 0.3. The market-risk premium is 10 percent and the risk-free rate is 6 percent. The corporate tax rate is 35 percent. The SML holds for the company.a. If a new project of the company has the same risk as the common stock of the firm, what is the cost of equity on the project?b. If a new project of the company has the same risk as the overall firm, what is the weighted average cost of capital on the project?R S= 6% + 1.15 10% = 17.5%R B= 6% + 0.3 10% = 9%a. Cost of equity = R S = 17.5%b. B / S = 0.25B / (B + S) = 0.2S / (B + S) = 0.8WACC = 0.8 17.5% + 0.2 9% (1 - 0.35)= 15.17%12.12 The equity beta for Adobe Online Company is 1.29. Adobe Online has a debt-to-equity ratio of 1.0. The expected return on the market is 13 percent. The risk-free rate is 7 percent. The cost of debt capital is 7 percent. The corporate tax rate is 35 percent.a. What is Adobe Online’s cost of equity?b. What is Adobe Online’s weighted average cost of capital?a. Cost of equity for National Napkin= 7 + 1.29 (13 - 7)= 14.74%b. B / (S + B) = S / (S + B) = 0.5WACC = 0.5 7 0.65 + 0.5 14.74= 9.645%12.14 First Data Co. has 20 million shares of common stock outstanding that are currently being sold for $25 per share. The firm’s debt is publicly traded at 95 percent of its face value of $180 million. The cost of debt is 10 percent and the cost of equity is 20 percent. What is the weighted average cost of capital for the firm? Assume the corporate tax rate is 40 percent.S = $25 20 million = $500 millionB = 0.95 $180 million = $171 millionB / (S + B) = 0.2548S / (S + B) = 0.7452WACC = 0.7452 20% + 0.2548 10% 0.60= 16.43%12.15 Calgary Industries, Inc., is considering a new project that costs $25 million. The project will generate after-tax (year-end) cash flows of $7 million for five years. The firm has a debt-to-equity ratio of 0.75. The cost of equity is 15 percent and the cost of debt is 9 percent. The corporate tax rate is 35 percent. It appears that the project has the same risk as that of the overall firm. Should Calgary take on the project?B / S = 0.75B / (S + B) = 3 / 7S / (S + B) = 4 / 7WACC = (4 / 7) 15% + (3 / 7) 9% (1 - 0.35)= 11.08%NPV = -$25 million +$7(.)milliont t101108 15+=∑= $819,299.04Undertake the project.12.16 Suppose Garagebandaaa has a 28 percent cost of equity capital and a 10 percent beforetax cost of debt capital. The firm’s debt-to-equity ratio is 1.0. Garageband is interested in investing in a telecomm project that will cost $1,000,000 and will provide $600,000 pretax annual earnings for 5 years. Given the project is an extension of its core business, the project risk is similar to the overall risk of the firm. What is the net present value of this project if Garageband’s tax rate is 35%?12.16WACC = (0.5) x 28% + (0.5) x 10% x (1 - 0.35)= 17.25%NPV = - $1,000,000 + (1 - 0.35) $600,000 51725.0A= $240,608.5013.4 Aerotech, an aerospace-technology research firm, announced this morning that it has hired the world’s most knowledgeable and prolific space researchers. Before today, Aerotech’s stock had been selling for $100.a. What do you expect will happen to Aerotech’s stock?b. Consider the following scenarios:i. The stock price jumps to $118 on the day of the announcement. In subsequent days it floats up to $123 then falls back to $116.ii. The stock price jumps to $116 and remains there.iii. The stock price gradually climbs to $116 over the next week.Which scenario(s) indicate market efficiency? Which do not? Why?a. Aerotech’s stock price should rise immediately after theannouncement of this positive news.b. Only scenario ii (the stock price jumps to $116 and remains there)indicates market efficiency. In that case, the price roseimmediately to the level that eliminated all possibility of abnormalreturns. In the other two scenarios, there are periods of timeduring which an investor could trade on the information and earnabnormal returns.15.15 The market value of a firm with $500,000 of debt is $1,700,000. EBIT is expected to be a perpetuity. The pretax interest rate on debt is 10 percent. The company is in the 34-percent tax bracket. If the company was 100-percent equity financed, the equityholders would require a 20-percent return.a. What would the value of the firm be if it was financed entirely with equity?b. What is the net income to the stockholders of this levered firm?a. Since V V T B L U C =+,V =V T B U L C -. L V = $1,700,000, B = $500,000 andC T = 0.34. Therefore, the value of the unlevered firm isU V = $1,700,000 - (0.34)($500,000) = $1,530,000b. Equity holders earn 20% after-tax in an all-equity firm. Thatamount is $306,000 (=$1,530,000 x 0.20). The yearly, after-taxinterest expense in the levered firm is $33,000 [=$500,000 x 0.10(1-0.34)]. Thus, the after-tax earnings of the equity holders in alevered firm are $273,000 (=$306,000 - $33,000). This amount is thefirm’s net income.15.16 An all-equity firm is subject to a 30-percent corporate tax rate. Its equityholders require a 20-percent return. The firm’s initial market value is $3,500,000, and there are 175,000 shares outstanding. The firm issues $1 million of bonds at 10 percent and uses the proceeds to repurchase common stock. Assume there is no change in the cost of financial distress for the firm. According to MM, what is the new market value of the equity of the firm?The initial market value of the equity is given as $3,500,000. On a per sharebasis this is $20 (=$3,500,000 / 175,000). The firm buys back $1,000,000 worth of shares, or 50,000 (= $1,000,000 / $20) shares.In this MM world with taxes,V V T B L U C =+= $3,500,000 + (0.3) ($1,000,000) = $3,800,000Since V = B + S, the market value of the equity is $2,800,000 (= $3,800,000 - $1,000,000).15.20 The Nikko Company has perpetual EBIT of $4 million per year. The after-tax, all-equity discount rate r 0 is 15 percent. The company’s tax rate is 35 percent. The cost of debt capital is 10 percent, and Nikko has $10 million of debt in its capital structure.a. What i s Nikko’s value?b. What is Nikko’s r WACC?c. What is Nikko’s cost of equity?a. million$20.83$100.3515.0)65.0(4$B T r )T EBIT(1BT V V C 0C C U L =⨯+=+-=+= b. 12.48%V )T EBIT(1r V S )T (1r V B r L C S LC B L WACC =-=+-=c. r r (B /S)(r r )(1-T S 00B C =+-)= 0.15 + [10 / (20.83 - 10)] (0.65) (0.15 - 0.10) = 18.01%If part c is done before part b, then an alternative solution topart b could be:rWACC = (10/20.83)(0.10)(1-0.35) + (10.83/20.83)(0.1801) = 0.124815.21 AT&B has a debt-equity ratio of 2.5. Its r WACC is 15 percent and its cost of debt is 11 percent. The corporate tax rate is 35 percent.a. What is AT&B’s cost of equity capital?b. What is AT&B’s unlevered cost of equity capital?c. What would the weighted average cost of capital be if the debt-to-equity ratio was 0.75? What if it were 1.5?a. r S = 0r + (B / S)( 0r – B r )(1 – C T )= 15% + (2.5)(15% – 11%)(1– 35%)= 21.50% b. If there is no debt, WACC r = r S = 15%c. S r = 15% + 0.75 (15% – 11%)(1 – 35%)= 16.95%B/S = 0.75, B = 0.75SB/(B+S) = 0.75S/(0.75S +S)= 0.75 /1.75S/(B+S) = 1– (0.75 /1.75) = (1/1.75)r WACC = (0.75/1.75)(0.11)(1– 0.35) + (1/1.75)(16.95%)= 12.75%S r = 15% + 1.5 (15% – 11%)(1 – 35%)= 18.90%B/S = 1.5, B = 1.5SB/(B+S) = 1.5S/(1.5S +S)= 1.5/2.5S /(B+S) = 1 – (1.5/2.5)WACC r = (1.5/2.5)(0.11)(1 – 0.35) + (1/2.5)(0.1890)= 11.85%Alternate solution: In the MM model with corporate taxes, rWACC < ro when there is debt. The following reworks the solution based on this premise.a. rWACC = 0.15 = (2.5/3.5)(1-0.35)(0.11) + rs(1/3.5)=> rS = 0.346250b. rS = ro + (B/S)(ro – rB)(1-TC)0.3463 = ro + 2.5(ro – 0.11)(0.65)=> ro = 0.2000c. 1. rS = 0.20 + 0.75(0.20 – 0.11)(0.65)= 0.2439=> rWACC = (0.75/1.75)(0.65)(0.11) + 0.2439(1/1.75)= 0.1700c. 2. rS = 0.20 + 1.5(0.20 – 0.11)(0.65)= 0.2878=> rWACC = (1.5/2.5)(0.65)(0.11) + 0.2878(1/2.5)= 0.158015.22 General Tools (GT) expects EBIT to be $100,000 every year, in perpetuity. The firm can borrow at 10 percent. GT currently has no debt. Its cost of equity is 25 percent. If the corporate tax rate is 40 percent, what is the value of the firm? What will the value be if GT borrows $500,000 and uses the proceeds to repurchase shares?Since this is an all-equity firm, the WACC = S r .$240,00025.0)4.01(000,100$r )T EBIT(1V S C U =-=-=If the firm borrows to repurchase its own shares, then the value ofGT will be:L V = U V + C T B()$440,000000,500$4.025.0)6.0(000,100$=⨯+=[文档可能无法思考全面，请浏览后下载，另外祝您生活愉快，工作顺利，万事如意!]。