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Chapter 10 Question 1 A firm has an equity beta of 1.1. The expected market risk...

Chapter 10 Question 1

A firm has an equity beta of 1.1. The expected market risk premium is 6%. T-bills currently pay 4%. The firm has two bond issues outstanding. The first currently sells for 102.23% of par and has a yield to maturity of 6%. Par value of bond issues is $2,500. The second has a current market price of 99.47% of par with a yield to maturity of 8%. There are 300,000 outstanding bonds in the first issue and 100,000 in the second. The firm’s equity has a current market price of $40 and there are 6 million shares outstanding. What is the firm’s WACC if the relevant tax rate is 37%?

Chapter 11 Question 2

Last year Hot Shots Exterminators, Inc. conducted an IPO, issuing 1 million common shares with a par value of $1 to investors at a price of $10 per share. During its first year of operation, Hot Shots earned a net income of $0.15 per share and paid a dividend of $0.01 per share. At the end of the year, the company's stock was selling for $20 per share. Construct the equity accounts for Hot Shots at the end of its first year in business, and calculate the firm's market capitalization.?

Chapter 12 Question 5

Couglin Inc. has net operating income of $120000 per year. Couglin uses no debt in its capital structure and the required rate of return to equity holders is 12 percen

A) Calculate the value of the unlevered firm if the firm has a marginal tax rate of 0%.

B) Calculate the value of the unlevered firm if the firm has a marginal tax rate of 30%.

These are 3 seprate questions from the same chapter
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Answer #1

Question 10

Total market value of equity = 6,000,000*40 = 240,000,000

Total debt value of issue 1 =1.0223*2500*300,000 = 766,725,000

Total debt value of issue 2 = 0.9947*2500*100000 = 248,675,000

Total = 1,255,400,000

Weight of equity (We) = 240,000,000/1,255,400,000 = 0.1912

Weight of debt issue 1 (Wd1) = 766,725,000/1,255,400,000 = 0.6107

Weight of debt issue 2 (Wd2) = 1-0.19585 -0.6257 = 0.1981

Cost of Equity = rf + beta *MRP = 4 =1.1*6 = 10.6%

WACC = 0.1912*10.6 + 0.6107*6*(1-0.37) +0.1981*8*(1-0.37) = 5.33%

WACC = 5.33%

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