Exercise 21 - Chapter 12 (HRWJJ, 2013)

Finanças Empresariais
The Dybvig Corporation's equity has a beta of 1.3.
If the risk-free rate is 4.5 per cent and the expected return on
the market is 12 per cent, what is Dybvig's cost of equity
capital?
Custo de capital

Nelson Areal
Departamento de Gestão

Exercise 23 - Chapter 12 (HRWJJ, 2013) Exercise 28 - Chapter 12 (HRWJJ, 2013)

The WACC of Veld Ltd is 20.9 per cent.

Shanken NV issued a 30-year, 10 per cent semi-annual
bond 7 years ago. The bond currently sells for 108 per cent The company's debt to assets ratio is 0.23 and its cost of
of its face value. The company's rate is 35 per cent. equity is 25 per cent. If the tax rate is 27 per cent, what is
Veld's pre-tax cost of debt?
a) What is the pre-tax cost of debt?
b) What is the after-tax cost of debt?
c) Which is more relevant, the pre-tax or the after-tax cost
of debt? Why?
Exercise 30 - Chapter 12 (HRWJJ, 2013)
Filer Manufacturing has 9.5 million shares of equity outstanding. The
current share price is £53, and the book value per share is £5.
Filer Manufacturing also has two bond issues outstanding. The first
bond issue has a face value of £75 million and an 8 per cent coupon
and sells for 93 per cent of par. The second issue has a face value of
£60 million and a 7.5 per cent coupon and sells for 96.5 per cent of
par.
The first issue matures in 10 years, the second in 6 years.
a) What are Filer's capital structure weights on a book value basis?
b) What are Filer's capital structure weights on a market value
basis?
c) Which are more relevant, the book or market value weights?
Why?
Exercise 40 - Chapter 12 (HRWJJ, 2013)
This is a comprehensive project evaluation problem bringing together
much of what you have learned in this and previous chapters.
Suppose you have been hired as a financial consultant to Defense
Electronics International (DED, a large, publicly traded firm that is the
market share leader in radar detection systems (RDSs). The company
is looking at setting up a manufacturing plant overseas to produce a
new line of RDSs. This will be a 5-year project.
The company bought some land three years ago for €7 million in
anticipation of using it as a toxic dump site for waste chemicals, but it
built a piping system to safely discard the chemicals instead. If the
company sold the land today, it would receive €6.5 million after taxes.
In 5 years the land can be sold for €4.5 million after taxes and
reclamation costs.
The company wants to build its new manufacturing plant on this land;
the plant will cost €15 million to build.
The following market data on DEl’s securities are current:
Exercise 33 - Chapter 12 (HRWJJ, 2013)
Given the following information for Huntington Power, find
the WACC. Assume the company's tax rate is 28 per cent.
Debt: 40,000 7 per cent coupon bonds outstanding, £100
par value, 20 years to maturity, selling for 103 per cent of
par; the bonds make semi-annual payments.
Equity: 90,000 shares outstanding, selling for £57 per share;
the beta is 1.10.
Market: 8 per cent market risk premium and 6 per cent risk-
free rate.
Exercise 40 - Chapter 12 (HRWJJ, 2013)
Debt: 150,000 7 per cent coupon bonds outstanding, 15
years to maturity selling for 92 per cent of par; the bonds
have a £100 par value each and make semi-annual
payments.
Equity: 300,000 shares outstanding, selling for £75 per
share; the beta is 1.3. Preference shares 20,000 shares
with 5 per cent dividends outstanding, selling for £72 per
share.
Market: 8 per cent expected market risk premium; 5 per
cent risk-free rate.
DEPs tax rate is 28 per cent. The project requires
£900,000 in initial net working capital investment to
become operational.
Exercise 40 - Chapter 12 (HRWJJ, 2013) Exercise 40 - Chapter 12 (HRWJJ, 2013)

d) The company will incur £400,000 in annual fixed costs. The plan is
a) Calculate the project's initial time 0 cash flow, taking into account
to manufacture 12,000 RDSs per year and sell them at £10,000
all side effects.
per machine; the variable production costs are £9,000 per RDS.
b) The new RDS project is somewhat riskier than a typical project for What is the annual operating cash flow (OCE) from this project?
DEL primarily because the plant is being located overseas.
e) DEI's comptroller is primarily interested i n the impact of DElts
Management has told you to use an adjustment factor of +2 per
investments On the bottom line of reported accounting
cent to account for this increased riskiness. Calculate the
statements. What will you tell her is the accounting break-even
appropriate discount rate to use when evaluating DEIts project.
quantity of RDSs sold for this project?
c) The manufacturing plant has an 8-year tax life, and DEI uses 20
f) Finally, DB's president wants you to throw all your calculations,
per cent reducing balance depreciation for the plant. At the end of
assumptions and everything else into the report for the chief
the project (i.e., the end of year 5), the plant can be scrapped for
financial officer; all be wants to know is the RDS project's internal
£5 million. What is the after-tax salvage value of this
rate of return, IRR, and net present value, NPV. What will you
manufacturing plant?
report?