Chapter 8

Ques 3.
Treasure bond Rate 6.40%
Market Risk Premium 5.55%
Beta 1.7

a
Cost of Equity 15.84%

b
When treasure bond 7.50%
COE 16.94%

c
Since it has no debt, all of its risk is due to business risk

Ques 6.
Initial Debt 50
Initial Equity 100
Initial beta 1.2
New D/E ratio 8
Tax 0.40
Unlevered beta 0.92
Levered bEta 0.16

Ques 7.
a.
Tax 0.4
Unlevered beta for Nowell 1.5
Unlevered beta for WP 1.3
Unlevered beta for combined firm 1.43

b.
Since D/E 0.5
New Beta 1.86

Ques 13.
Intercept of regression 0.06%
X-coefficient regression 0.46
Standard error of X-coefficient 0.2
R^2 5%
outstanding shares 20 mn
Share Price of Mapco 2
Mapco oustanding debt 20
Corporate tax return 36%
Equity risk premium 5.50%
Treasury bond 6%
a
Expected Return for Mapco 8.53%

b
Diversified risk 95%

c
Existing D/E ratio 0.5
Unlevered beta for the firm 0.35
Debt 20
Equity 40
Unlevered beta without diversified division 0.42
Unlevered beta with new division 0.63
New D/E 1.25
New levered beta 1.14

Ques 18
Debt 13
Equity 17.75
Tax 36%
Beta 1.05

a
Unlevered beta 0.71

b
When Dividnend Is paid
D/E 1.02
Value of firm before dividne 30.75
Cash 8
Value of firm after cash adj 22.75
Unlvered beta after dividend 0.97
Beta after dividend 1.60
Ques 20
Average beta 0.95
D/E 35%
Debt ratio 25%
Tax 36%

a
Unlevered beta for food business 0.77614379
Beta for food division 0.9003268

b
Yes. The higher fixed cost structure would lead me to use a
higher unlevered beta for Nabisco
 Chapter 10

Ques 1
Tax paid 12.5
Taxable income 50
Reinvesting 15
Cost of capital 11%
Tax Rate Marginal 35%
Grwoth rate 10%
Terminal growth rate 5%

Effective tax rate 25%

After tax Operating Income 37.5
After Marginal Tax Income 32.5

Year 0 1 2 3 Terminal
After Tax Operating Income 37.5 41.25 45.375 49.9125 45.42
Reinvesting 15.00 16.5 18.15 19.965 20.96
FCFF 22.50 24.75 27.23 29.95 24.46
Terminal value 407.62
PV ₹66.29 298.05
Sum of PV of firm ₹364.34

Ques 4
Current Assets 91524
Current Liabilities 86796
Noncash Current Assets 71597
Noncash Current Liabilities 50596
Net Working Capital 4728
Net Noncash working capital 21001
Noncash WC as % of revenue 13.55%

Ques 5
a
Year 1 2 3 4
Revenue 154951 170446.1 187490.71 206239.781 226863.759
Change in Revenue 15495.1 17044.61 18749.071 20623.9781
Working Cap % of revenue 13.55% 13.55% 13.55% 13.55%
New Non Cash Working Cap 23101.10 25411.21 27952.33 30747.56
Change in Working Cap 2100.10 2310.11 2541.12 2795.23
b
Working Cap % of revenue 4.30% 4.30% 4.30% 4.30%
New Non Cash Working Cap 6662.893 7329.18 8062.10 8868.31 9755.14
Change in Working Cap 666.29 732.92 806.21 886.83

Ques 6
a
Revneue after growth 1100
EBI 88
Change in WC -5
FCFF 93

b
If forecasting for the next 10
years, rather than maintaining
the current level of NWC, we
typically assume that the
company’s % of revenue ratio
will approach the industry
average.
 5
249550.135
22686.3759
13.55%
33822.32
3074.76
 4.30%
10730.66
975.51
 Chapter 11

Ques 3
Net Income 150
Equity value 1000
Capex 160
Depreciation 100
Increase in WC 40
Increase in Debt 40
Amount of equity reinvested 60
Reinvestment rate 40%
ROE 15%
Growth rate 6%

Ques 4
EBI 100
Capital 800
Net Capex 25
Non cash WC increased 15
Reinvestment 40
Reinvestment rate 40%
ROC 12.50%
a
Expected growth rate 5%

b
New ROC 12.81%
Expected growth rate 5.13%