Solutions to Exercises Session 2 (Capital Structure) 14-1QBE = [pic] QBE = [pic] QBE = 500,000 units.
14-4From the Hamada equation, b = bU[1 + (1 – T)(D/E)], we can calculate bU as bU = b/[1 + (1 – T)(D/E)]. bU = 1. 2/[1 + (1 – 0. 4)($2,000,000/$8,000,000)] bU = 1. 2/[1 + 0. 15] bU = 1. 0435.
14-8Facts as given: Current capital structure: 25% debt, 75% equity; rRF = 5%; rM – rRF = 6%; T = 40%; rs = 14%. Step 1:Determine the firm’s current beta. rs= rRF + (rM – rRF)b 14%= 5% + (6%)b 9%= 6%b 1. 5= b. Step 2:Determine the firm’s unlevered beta, bU. bU= bL/[1 + (1 – T)(D/E)] 1. 5/[1 + (1 – 0.
Need Help Writing an Essay?
Tell us about your assignment and we will find the best writer for your paper.
Write My Essay For Me 4)(0. 25/0. 75)] = 1. 5/1. 20 = 1. 25. Step 3:Determine the firm’s beta under the new capital structure.
bL= bU[1 + (1 – T)(D/E)] = 1. 25[1 + (1 – 0. 4)(0. 5/0. 5)] = 1. 25(1. 6) = 2.
Step 4:Determine the firm’s new cost of equity under the changed capital structure. rs= rRF + (rM – rRF)b = 5% + (6%)2 = 17%. 14-9a. a. If net income = $1,000,000 and dividend payout ratio = 40%, then the total amount of dividend paid in Year 0 was 40% x $1,000,000 = $400,000. Therefore, the current dividend per share, D0, = $400,000/200,000 shares = $2. 0.
D1 = $2. 00(1. 05) = $2. 10. Therefore, P0 = D1/(rs – g) = $2. 10/(0. 134 – 0.
05) = $25. 00. b. Step 1:Calculate EBIT before the recapitalization: The firm is 100% equity financed, so there is no interest expense. (EBIT = EBT NI = EBT – Taxes = EBT – EBT(T) = EBT (1-T) ? EBIT = EBT = NI/ (1-T) = $1,000,000/(1 – T) = $1,000,000/0. 6 = $1,666,667. Step 2:Calculate net income after the recapitalization: EBT = EBIT – Interest expense = $1,666,667 – 11%($1,000,000) $1,666,667 – $110,000 = $1,566,667 NI = EBT (1–T) = $1,566,667(.
) = $934,000 Step 3:Calculate the number of shares outstanding after the recapitalization: The company takes out a $1,000,000 to repurchase stock currently prices at $25. Number of shares after recapitalization: 200,000 – ($1,000,000/$25) = 160,000 shares. Step 4:Calculate D1 after the recapitalization: Given the 40% payout ratio: D0 = 40%($934,000/160,000) = $2. 335. D1 = $2. 335(1. 05) = $2.
45175. Step 5:Calculate P0 after the recapitalization: P0 = D1/(rs – g) = $2. 45175/(0. 145 – 0. 05) = $25. 8079 ( $25. 81.
The post Exercises from Financial Management Book, Chapter14 appeared first on Course Help Online.
Custom academic and business writing services. You made my dreams come true! I got better results than any other student for a very complex capstone project! Your company is very helpful. Thanks! Would you like to make your academic life easier? We offers you a perfect chance to buy essays online and let our writers take care of your academic achievements! Each paper is composed from scratch, according to your instructions
Ask for Instant Assignment Writing Help. No Plagiarism Guarantee!
