Chapter 13

Problems 1-24

Input boxes in tan

Output boxes in yellow
Given data in blue
Calculations in red
Answers in green

NOTE: Some functions used in these spreadsheets may require that

the "Analysis ToolPak" or "Solver Add-in" be installed in Excel.
To install these, click on "Tools|Add-Ins" and select "Analysis ToolPak"
and "Solver Add-In."
sis ToolPak"
Chapter 13
Question 1

Input Area:

Beta 1.17
Risk-free rate 3.8%
Market return 11%

Output Area:

Cost of equity 12.22%

Chapter 13
Question 2

Input Area:

Settlement 01/01/00
Maturity 01/01/13
Price (% of par) 95
Coupon rate 7%
Payments per year 2
Tax rate 35%

Output Area:

Pretax cost 7.61%

Aftertax cost of debt 4.95%
 Chapter 13
Question 3

Input Area:

Settlement 01/01/00
Maturity 01/01/24
Price (% of par) 108
Coupon rate 5.90%
Payments per year 2
Tax rate 35%

Output Area:

a. Pretax cost of debt 5.31%

b. Aftertax cost of debt 3.45%
c. The aftertax rate is more relevant because
that is the actual cost to the company.
Chapter 13
Question 4

Input Area:

Book value of debt issue (1) $ 35,000,000

Second issue
Settlement date 01/01/00
Maturity date 01/01/12
Annual coupon rate 0%
Coupons per year 2
Bond price (% of par) 61
Tax rate 35%
Book value debt issue (2) $ 80,000,000

Output Area:

Book value of debt $ 115,000,000

Market value of debt $ 86,600,000

Pretax cost of second issue 4.162%

Aftertax cost of second issue 2.71%

Aftertax cost of debt 3.03%

Chapter 13
Question 5

Input Area:

Common stock 70%

Debt 30%
Cost of equity 11.5%
Cost of debt 5.9%
Tax rate 35%

Output Area:

WACC 9.20%
Chapter 13
Question 6

Input Area:

Debt-to-equity ratio 0.55

Cost of equity 12.5%
Cost of debt 7%
Tax rate 35%

Output Area:

WACC 9.68%
Chapter 13
Question 7

Input Area:

WACC 9.80%
Cost of equity 13%
Cost of debt 6.5%
Tax rate 35%

Output Area:

D/E 0.5740
 Chapter 13
Question 8

Input Area:

Shares outstanding 8,300,000

Market price per share $ 53
Book value per share $ 4
Bond I
Book value $ 70,000,000
Coupon rate 7.00%
Bond price (% of par) 108.3
Settlement date 01/01/00
Maturity date 01/01/08
Payments per year 2
Bond II
Book value $ 60,000,000
Coupon rate 7.50%
Bond price (% of par) 108.9
Settlement date 01/01/00
Maturity date 01/01/27
Payments per year 2

Output Area:

a. BV(E) $ 33,200,000
BV(D) $ 130,000,000
V $ 163,200,000

E/V 0.2034
D/V 0.7966

b. MV(S) $ 439,900,000
MV(B) $ 141,150,000
V $ 581,050,000

S/V 0.7571
B/V 0.2429
The market value weights are more relevant
because they represent a more current
valuation of the debt and equity.
Chapter 13
Question 9

Input Area:

Shares outstanding 8,300,000

Market price per share $ 53
Book value per share $ 4
Bond I
Book value $ 70,000,000
Coupon rate 7.00%
Bond price (% of par) 108.3
Settlement date 01/01/00
Maturity date 01/01/08
Payments per year 2
Bond II
Book value $ 60,000,000
Coupon rate 7.50%
Bond price (% of par) 108.9
Settlement date 01/01/00
Maturity date 01/01/27
Payments per year 2

Beta 1.15
Risk-free rate 3.70%
Market risk premium 7.00%
Tax rate 35%

Output Area:

RE 11.75%
Pretax cost of bond I 5.69%
Aftertax cost of bond I 3.70%
Pretax cost of bond II 6.78%
Aftertax cost of bond II 4.41%
Market value of debt $ 141,150,000
Weight of bond I 0.537
Weight of bond II 0.463
Company's aftertax
cost of debt 4.027%

WACC 9.87%
 Chapter 13
Question 10

Input Area:

Debt-to-equity ratio 0.45

WACC 9.80%
Tax rate 35%
a. Cost of equity 13%
b. Aftertax cost of debt 5.9%

Output Area:

a. RD 4.14%

b. RE 11.56%
Chapter 13
Question 11

Input Area:

Debt
Bonds outstanding 10,000
Settlement date 01/01/00
Maturity date 01/01/25
Annual coupon rate 5.60%
Coupons per year 2
Bond price (% of par) 97

Common stock
Shares outstanding 425,000
Beta 0.95
Share price $ 61

Market
Market risk premium 7.00%
Risk-free rate 3.80%
Tax rate 35%

Output Area:

Market value of debt $ 9,700,000

Market value of equity $ 25,925,000
Market value of firm $ 35,625,000

Pretax cost of debt 5.83%

Aftertax cost of debt 3.79%

Cost of equity 10.45%

WACC 8.64%
 Chapter 13
Question 12

Input Area:

Debt
Bonds outstanding 230,000
Settlement date 01/01/00
Maturity date 01/01/20
Annual coupon rate 6.40%
Coupons per year 2
Bond price (% of par) 104

Common stock
Shares outstanding 8,700,000
Beta 1.20
Share price $ 37

Market
Market risk premium 7.00%
Risk-free rate 3.50%
Tax rate 35%

Output Area:

a. Market value of debt $ 239,200,000

Market value of equity $ 321,900,000
Market value of firm $ 561,100,000

B/V 0.4263
S/V 0.5737

b. For projects equally as risky as the firm itself, the

WACC should be used as the discount rate.

Pretax cost of debt 6.05%

Aftertax cost of debt 3.93%

Cost of equity 11.90%

WACC 8.50%
 Chapter 13
Question 13

Input Area:

Project Beta IRR

W 0.80 9.4%
X 0.95 10.9%
Y 1.15 13.0%
Z 1.45 14.2%

Firms cost of capital 11%

Market expected return 11%
T-bill rate 3.5%

Output Area:

a. Project
W Lower
X Lower
Y Higher
Z Higher

b. Project CAPM E(R) Accept/Reject

W 9.50% Reject
X 10.63% Accept
Y 12.13% Accept
Z 14.38% Reject

c. Project
W Correctly Rejected
X Incorrectly Rejected
Y Correctly Accepted
Z Incorrectly Accepted
 Chapter 13
Question 14

Input Area:

Cost $ 35,000,000
Debt-equity ratio 0.75
Equity flotation cost 6%
Debt flotation cost 2%

Output Area:

a. He should look at the weighted average

flotation cost, not just the debt cost.

b. fT 4.29%

c. Cost $ 36,567,164
Even if the specific funds are actually being
raised completely from debt, the flotation
costs and hence true investment cost should
be valued as if the firm's target capital
structure is used.
Chapter 13
Question 15

Input Area:

Cost $ 55,000,000

Capital structure:
Common stock 65%
Preferred stock 5%
Debt 30%

Flotation cost:
Common stock 7%
Preferred stock 4%
Debt 3%

Output Area:

fT 0.057

Cost $ 58,293,588
Chapter 13
Question 16

Input Area:

Aftertax cash savings $ 2,900,000

Growth rate 4%
Adjustment factor 2%
Debt-equity ratio 0.65
Cost of equity 13%
Aftertax cost of debt. 5.5%

Output Area:

WACC 10.05%
Project discount rate 12.05%
Breakeven cost $ 36,045,198
The project should only be undertaken if its
cost is less than $ 36,045,198
Chapter 13
Question 17

Input Area:

Bond 1:
Bonds outstanding 50,000
Settlement date 1/1/2000
Maturity date 1/1/2020
Annual coupon rate 5.70%
Coupons per year 2
Bond price (% of par) 106.50

Bond 2:
Bonds outstanding 200,000
Settlement date 1/1/2000
Maturity date 1/1/2030
Annual coupon rate 0%
Coupons per year 2
Bond price (% of par) 17.50

Common stock
Shares outstanding 2,300,000
Beta 1.20
Share price $ 65

Preferred stock outstanding

Shares outstanding 125,000
Coupon rate 4.00%
Share price $ 79

Market
Market risk premium 7.00%
Risk-free rate 4.00%
Tax rate 40%

Output Area:

Market value of bond 1 $ 53,250,000

Market value of bond 2 $ 35,000,000
Market value of equity $ 149,500,000
Market value of preferred $ 9,875,000
Market value of firm $ 247,625,000

Bond 1 pretax cost 5.17%

Bond 1 aftertax cost 3.10%

Bond 2 pretax cost 5.90%

Bond 2 aftertax cost 3.54%

Cost of equity 12.40%

Cost of preferred 5.06%

WACC 8.86%
Chapter 13
Question 18

Input Area:

Projected cost $ 19,000,000

Flotation costs $ 1,150,000
Equity flotation cost 7%
Debt flotation costs 3%

Output Area:

Total costs $ 20,150,000

f(T) 5.71%
D/E 0.4775
 Chapter 13
Question 19

Input Area:

Beta 1.15
Dividend per share $ 0.85
Growth rate 4.5%
Market return 11.0%
T-bill rate 3.9%
Stock price $ 76.00

Output Area:

a. RE: DDM 5.67%

b. RE: CAPM 12.07%

c. When using the dividend growth model or

the CAPM, you must remember that both
are only estimates for the cost of equity.
Additionally, and perhaps more importantly,
each method of estimating the cost of
equity depends upon different assumptions.
Chapter 13
Question 20

Input Area:

Current cash flow from assets $ 6,800,000

Initial growth rate in CFA 8%
Terminal CFA growth rate 4%
Schultz WACC 12%
Arras WACC 10%
Shares outstanding 2,500,000
Debt value $ 30,000,000
Output Area:

Cash flows:
Year 1 $ 7,344,000
Year 2 $ 7,931,520
Year 3 $ 8,566,042
Year 4 $ 9,251,325
Year 5 $ 9,991,431
Year 6 $ 10,391,088

Teminal value $ 173,184,803

Value of company today $ 139,723,941

Value of equity $ 109,723,941

Share price $ 43.89

 Chapter 13
Question 21

Input Area:

Happy Times:
Debt market value $ 140,000,000
Cost of debt 6%
Equity market value $ 380,000,000
Cost of equity 11%
Joe's:
Debt value $ 40,000,000
Projected EBIT in one year $ 16,800,000
EBIT 5 year growth rate 10%
Perpetual growth rate in CF 3%
Net working capital percentage 9%
Capital spending percentage 15%
Depreciation percentage 8%
Shares outstanding 1,950,000
Tax rate 38%

b. EV/EBITDA multiple 8
 Output Area:

Weight of debt 26.92%

Weight of equity 73.08%
RWACC 9.04%

Year 1 Year 2 Year 3

EBIT $ 16,800,000 $ 18,480,000 $ 20,328,000
Taxes 6,384,000 7,022,400 7,724,640
Net income 10,416,000 11,457,600 12,603,360
Depreciation 1,344,000 1,478,400 1,626,240

OCF $ 11,760,000 $ 12,936,000 $ 14,229,600

- Capital spending 2,520,000 2,772,000 3,049,200
- Change in NWC 1,512,000 1,663,200 1,829,520
Cash flow from assets $ 7,728,000 $ 8,500,800 $ 9,350,880

Year 5 terminal value $ 192,947,049

Value of company today $ 161,238,529

Value of equity $ 121,238,529

Share price $ 62.17

b. Year 5 EBITDA $ 26,564,630

Year 5 terminal value $ 212,517,043

Value of company today $ 166,594,158

Value of equity $ 126,594,158

Share price $ 64.92

 Year 4 Year 5
$ 22,360,800 $ 24,596,880
8,497,104 9,346,814
13,863,696 15,250,066
1,788,864 1,967,750

$ 15,652,560 $ 17,217,816
3,354,120 3,689,532
2,012,472 2,213,719
$ 10,285,968 $ 11,314,565
Chapter 13
Question 22

Input Area:

Debt-to-equity ratio 0.55

Projected cost $ 50,000,000
Aftertax cash flows $ 6,700,000
Equity flotation costs 8%
Required return 14%
Debt flotation costs 4%
Coupon rate 8%
Target ratio A/P to LTD 20%
A/P flotation costs 0%
Tax rate 35%

Output Area:

Accounts payable weight 0.17

long-term debt weight 0.83
WACC 11.23%
Flotation costs 6.34%
Project cost $ 53,386,912
NPV $ 6,251,949
Chapter 13
Question 23

Input Area:

Debt-to-equity ratio 0.85

Projected cost $ 145,000,000
Equity flotation costs 8%
Debt flotation costs 3.50%
Percentage equity
raised internally 0%

Output Area:

wD 45.95%
wE 54.05%
flotation costs 5.93%

Project cost $ 154,144,519

 Chapter 13
Question 24

Input Area:

Land price $ 7,500,000

Current land value $ 7,100,000
Land value in 5 years $ 7,400,000
Plant & Equipment cost $ 40,000,000

Debt
Bonds outstanding 260,000
Settlement date 01/01/00
Maturity date 01/01/25
Annual coupon rate 6.80%
Coupons per year 2
Face value (% of par) 100
Bond price (% of par) 103

Common stock
Shares outstanding 9,500,000
Beta 1.25
Share price $ 67.00

Preferred stock outstanding

Shares outstanding 450,000
Coupon rate 5.25%
Share price $ 84.00

Market
Market risk premium 7.00%
Risk-free rate 3.60%

Equity flotation cost 6.50%

Preferred flotation cost 4.50%
Debt flotation cost 3.00%
Tax rate 35%
Net working capital $ 1,400,000
Does the NWC require
flotation costs (Yes/No) Yes

b. Adjustment factor 2%
c. Life of plant (years) 8
Life of project (years) 5
Plant salvage value $ 8,500,000
d. Annual fixed costs $ 7,900,000
# RDS manufactured 18,000
Sale price per RDS $ 10,900
Variable costs per RDS $ 9,450
 Output Area:

Market value of debt $ 267,800,000

Market value of equity $ 636,500,000
Market value of preferred $ 37,800,000
Market value of firm $ 942,100,000

D/V 0.2843
E/V 0.6756
P/V 0.0401

a. flotation costs 0.0542

The cost of the land 3 years ago is a sunk
cost and is irrelevant.
Land $ (7,100,000)
Plant (including flotation) (42,294,408)
Net working capital (1,480,304)
$ (50,874,712)

b. Pretax cost of debt 6.55%

Aftertax cost of debt 4.26%
Cost of equity 12.35%
Cost of preferred 6.25%
WACC 9.81%

Discount rate for project 11.81%

c. Book value in year 5 $ 15,000,000

Aftertax salvage value $ 10,775,000

d. Sales $ 196,200,000
Variable costs (170,100,000)
Fixed costs (7,900,000)
Depreciation (5,000,000)
EBIT $ 13,200,000
Taxes (4,620,000)
Net income $ 8,580,000
Depreciation 5,000,000
Operating cash flow $ 13,580,000

e. Accounting breakeven 8,897

f. Year Cash Flow

0 $ (50,874,712)
1 13,580,000
2 13,580,000
3 13,580,000
4 13,580,000
5 33,155,000

IRR 18.11%
NPV $ 9,518,935.29