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    16 views3 pages

    Chapter 12 Battle of The Groups A Key PDF

    Uploaded by

    Mary Christen Canlas

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Flag for inappropriate content
    of 3

    1. Current bond price = (19.

    4 /20) $1,000 = $970

    $970 = $35 ({1 - 1 / [1 + (RD / 2)]13} / (RD / 2))+ $1,000 / [1 + (RD / 2)]13

    RD = 7.59 percent

    2. RE = .043 + 1.12(.132-.043)] = .14268


    RE = [($1.84× 1.021) / $31] + .021 = .08160
    Average RE = (.14268 + .08160)/2 = .1121, or 11.21 percent

    3. $1,031 = [(.08  $1,000) / 2]  ({1 – 1 / [1 + (r/ 2)]54} / (r / 2)) + $1,000 / [1 + (r / 2)]54

    r = 7.725 percent

    Aftertax cost of debt = .07725  (1 –.34) = .0510, or 5.10 percent

    4. WACC = .124 = (1/1.47)(x) + (.47 /1.47)(.061) x = 15.36 percent

    5. Common stock = 21,000  $29 = $609,000

    Preferred stock = 2,000  $71 = $142,000

    Debt = $386,000

    Value = $609,000 + 142,000 + 386,000 = $1,137,000

    Weight of preferred= $142,000/$1,137,000 = .1249, or 12.49 percent

    6. $940= (.06 $1,000) ({1 - [1 / (1 + RD )11]} / RD) + $1,000 / (1 + RD)11

    RD = 6.79 percent
    7. $1,016 = $90 ({1 - [1 / (1 + RD )8]} / RD) + $1,000 / (1 + RD)8

    RD = 8.714 percent

    Aftertax cost of debt = 8.714 percent (1 -.34) = .0575, or 5.75 percent

    8. $1,012 = ([(.08 $1,000) / 2]  ({1 – 1 / [1 + (RD / 2)]12} / (RD / 2))+ $1,000 / [1 + (RD/ 2)]12

    RD =7.7462 percent

    $990 = ([(.075  $1,000) / 2]  ({1 – 1 / [1 + (RD / 2)]26} / (RD / 2))+ $1,000 / [1 + (RD/ 2)]26

    RD = 7.6226 percent

    Market values: ($5m  1.012) + ($18m  .99) = $5.06 + 17.82m = $22.88m

    Aftertax cost of debt = [($5.06/$22.88)(.077462) + ($17.82m /$22.88m)(.076226]  (1 –.34) = .0505, or 5.05 percent

    9. Weight of equity = 1/1.45 = .6897, or 68.97 percent

    10. Common: 284,000  $68 = $19,312,000


    Preferred: 9,000  $88 = $792,000

    Debt: 7,500  .979  $1,000 = $7,342,500

    Value = $19,312,000 + 792,000 + $7,342,500 = $27,446,500

    RE = .041 + 1.04(.146–.041) = .1502

    RE = ($2.62 /$68) + .025 = .0635

    Average RE = (.1502+ .0635)/2 = .1069

    RP = $8/$88 = .0909

    $979 = [(.068  $1,000) / 2]  ({1– 1 / [1 + (r/ 2)]22} / (r / 2)) + $1,000 / [1 + (r / 2)]22

    r = 7.08 percent

    WACC = ($19,312,000/$27,446,500)(.1069) + ($792,000/$27,446,500)(.0909) + ($7,342,500/$27,446,500)(.0708)(1 –.34) = .090, or 9.0


    percent

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