Problem 1: Value of Assets

0% Debt/ 25% Debt/ 50% Debt/

100% Equity 75% Equity 50% Equity
Book Value of Debt 0 $ 2,500.00 $ 5,000.00
Book Value of Equity $ 10,000.00 $ 7,500.00 $ 5,000.00

Market Value of Debt 0 $ 2,500.00 $ 5,000.00

Market Value of Equity $ 10,000.00 $ 8,350.00 $ 6,700.00

Pretax Cost of Debt (rd) 0.05 0.05 0.05

After-Tax Cost of Debt (ri) 0.033 0.033 0.033

Market Value Weights of

Debt 0 0.23 0.43
Equity 1 0.77 0.57
Unlevered Beta 0.80 0.80 0.80
Levered Beta 0.80 0.96 1.19
Risk-Free Rate 0.05 0.05 0.05
Market Premium 0.06 0.06 0.06
Cost of Equity (re) 0.10 0.11 0.12
Cost of Debt 0.033 0.033 0.033
Weighted-Average Cost of Capital 0.10 0.09 0.08
EBIT $ 1,485.00 $ 1,485.00 $ 1,485.00
Taxes (@ 34%) $ 504.90 $ 504.90 $ 504.90
EBIAT $ 980.10 $ 980.10 $ 980.10
+ Depreciation $ 500.00 $ 500.00 $ 500.00
- Capital exp. $ (500.00) $ (500.00) $ (500.00)
+ Change in net working capital 0 0 0
OCF 1,480.10 1,480.10 1,480.10
NFAI $ 500.00 $ 500.00 $ 500.00
NCAI 0 0 0
Free Cash Flow $ 980.10 $ 980.10 $ 980.10

Value of Assets (FCF/WACC) $ 10,001.02 $ 10,851.11 $ 11,701.19

Problem 2: Value of Equity and Debt

0% Debt/ 25% Debt/ 50% Debt/

100% Equity 75% Equity 50% Equity

Cash flow to creditors:

Interest 0 $ 125.00 $ 250.00
Pretax cost of debt (rd) 0.05 0.05 0.05
Value of debt: (CF/rd) 0 $ 2,500.00 $ 5,000.00

Cash flow to shareholders:

EBIT $ 1,485.00 $ 1,485.00 $ 1,485.00
- Interest 0 ($125) ($250)
Pretax profit $ 1,485.00 $ 1,360.00 $ 1,235.00
Taxes (@ 34%) $ 504.90 $ 462.40 $ 419.90
Net income $ 980.10 $ 897.60 $ 815.10
+ Depreciation $ 500.00 $ 500.00 $ 500.00
- Capital exp. $ (500.00) $ (500.00) $ (500.00)
+ Change in net working capital 0 0 0
- Debt amortization 0 0 0
Residual cash flow $ 980.10 $ 897.60 $ 815.10

Cost of equity 0.10 0.11 0.12

Value of equity (CF/re) $ 10,001.02 $ 8,350.93 $ 6,700.82

Value of equity plus value of debt $ 10,001.02 $ 10,850.93 $ 11,700.82

Problem 3: Business Flows and Financing Effects

0% Debt/ 25% Debt/ 50% Debt/

100% Equity 75% Equity 50% Equity

Pure Business Cash Flows:

EBIT $ 1,485 $ 1,485 $ 1,485
Taxes (@ 34%) $ (505) $ (505) $ (505)
EBIAT $ 980 $ 980 $ 980
+ Depreciation $ 500 $ 500 $ 500
- Capital exp. $ (500) $ (500) $ (500)
+ Change in net working capital 0 0 0
Cash Flow $ 980 $ 980 $ 980

Unlevered Beta 0.8 0.8 0.8

Risk-Free Rate 0.05 0.05 0.05
Market Premium 0.06 0.06 0.06
Unlevered WACC 9.80% 9.80% 9.80%

Value of Pure Business Flows:

(FCF/Unlevered WACC) $ 10,001.02 $ 10,001.02 $ 10,001.02

Financing Cash Flows

Interest 0 $ (125.00) $ (250.00)
Tax Reduction 0 $ (42.50) $ (85.00)

Pretax Cost of Debt 0.05 0.05 0.05

Value of Financing Effect:

(Tax Reduction/Pretax Cost of Debt) $ - $ (850.00) $ (1,700.00)

Total Value (Sum of Values of

Pure Business Flows and Financing Effects) $ 10,001.02 $ 10,851.02 $ 11,701.02
 0% Debt/ 25% Debt/ 50% Debt/
100% Equity 75% Equity 50% Equity

Value of Asset $ 10,001.02 $ 10,851.02 $ 11,701.02

Cash Paid Out $ - $ 2,500.00 $ 5,000.00
Total Market Value of Equity $ 10,001.02 $ 8,351.02 $ 6,701.02
Number of Original Shares 1,000 1,000 1,000
Total Value Per Share $ 10.00 $ 10.85 $ 11.70
Exhibit 1
Koppers Company, Inc.

Before After
Recapitalization Recapitalization

Book Value Balance Sheets

Net working capital $ 212,453.00 $ 1,778,139.00
Fixed assets $ 601,446.00 $ 601,446.00
Total assets $ 813,899.00 $ 2,379,585.00

Additional debt $ 1,565,686.00

Long-term debt $ 172,409.00 $ 1,738,095.00
Deferred taxes, etc. $ 195,616.00 $ 195,616.00
Preferred stock $ 15,000.00 $ 15,000.00
Common equity $ 430,874.00 $ 430,874.00
Total capital $ 813,899.00 $ 2,379,585.00

Market-Value Balance Sheets

Net working capital $ 212,453.00 $ 1,778,139.00
Fixed assets $ 1,618,081.00 $ 1,618,081.00
PV debt tax shield $ 58,619.00 $ 590,952.30
Total assets $ 1,889,153.00 $ 3,987,172.30

Long term debt $ 172,409.00 $ 1,738,095.00

Deferred taxes, etc. $ - $ -
Preferred stock $ 15,000.00 $ 15,000.00
Common equity $ 1,701,744.00 $ 2,234,077.30
Total capital $ 1,889,153.00 $ 3,987,172.30

Number of shares $ 28,128.00 $ 28,128.00

Price per share $ 60.50 $ 79.43

Value to Public Shareholders

Cash received $ - $ 1,565,686.00
Value of shares $ 1,701,744.00 $ 2,234,077.30
Total $ 1,701,744.00 $ 3,799,763.30
Total per share $ 60.50 $ 135.09