Chap 15

1. Number of share needed to make sure that you can be elected in straight voting =
50%*900,000 + 1 = 450,001
Cost = 450,001*41 = 18,450,041
Number of share needed to make sure that you can be elected in cumulative voting
= 1/8 * 900,000 + 1 = 112,501
Cost = 112,501*41 = 4,612,541
2. Under cumulative voting, she will need 1 / (N + 1) percent of the stock (plus one
share) to guarantee election. So, the percentage of the company’s stock she needs
is:1/(9+1) = 1/10 = 10% < 17.4% => Her nominee is guaranteed election.
If the elections are staggered, the percentage of the company’s stock needed is:
1/(3+1) = 25% > 17.4% => Her nominee is no longer guaranteed election.
3.
The bond will be called whenever the price of the bond is greater than the call
price of $1,150. First, we need to find the expected price in one year.
Coupon payment = 1,000 * 10% = 100
Scenario 1: 60% interest rate increase to 12%, the price of the bond will be the
present value of the perpetual interest payments, so:
P1 = 100/12% = 833.33 < 1,150 => company will not call
Scenario 2: 40% interest rate decrease to 7%:
P2 = 100/7% = 1,428.57 > 1,150 => company will call and buy back share at 1,150
The price of the bond today is the present value of the expected price in one year +
coupon payment made in one year.
P0 = [60%*833.33 + 40%*1,150]/(1+10%) + 100/(1+10%)
= 963.64
Chap 16
1)
Levered firm, B=12, 000, Rb =6% , EBIT = 2000, Tc = 30%, R0 = 11%
RS = R0 + (B/S)×(1-TC)×(R0 - RB)
VL = Vu + TcB = EBIT * (1-Tc)/R0 + TcB = 2,000*0.7/11% + 0.3*12,000 =
16,327.28
S = VL – B = 16,327.28 – 12,000 = 4,327.28
RS = R0 + (B/S)×(1-TC)×(R0 - RB) = 11% + 12,000/4,327.28*0.7*(11%-6%)=
20.7%
2)
EBIT = 180,000 , Rb = 9%, R0 = 15%, Tc = 30%
a)Vu = EBIT(1-Tc)/R0 = 180,000*0.7 /15% = 840,000
VL = Vu + TcB = 879,000
b) S=VL – B = 879,000 – 130,000 = 749,000
RS = R0 + (B/S)×(1-TC)×(R0 - RB) = 15% + 130,000/749,000 * 0.7 *(15% -
9%) = 15.73%

B SL
RW ACC = ´ RB ´ (1 - TC ) + ´ RS
B+SL B + SL
Rwacc = 130,000/879,000*9%*0.7 + 749,000/879,000 * 15.73% = 14.33%