## FINANCE-Yield of this bond can be calculated in Excel as =RATE (10,-105,1124,-1000).

## FINANCE-Yield of this bond can be calculated in Excel as =RATE (10,-105,1124,-1000).

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(a)

Yield of this bond can be calculated in Excel

as =RATE (10,-105,1124,-1000). This is equal to 8.60%.

Cost of capital = bond

yield *(1-tax rate) = 8.60%*(1-34%) =5.67%

(b) m(p)=

d(1+g)/ r-g

m(p)=27.58

d=1.75

g=7.5%

27.58 = 1.75 (1+7.5%)/(r-7.5%)

r= 7.56% Wrong: 14.32

C. Cost of Common equity ?

D. Bond selling to yield 12.8 percent where the firms tax

rate is 34 percent?

3.

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Firmâs cost of preferred stock = 2.74/35.06

Firmâs

cost of preferred stock = 7.81%WRONG

The flotation costs adjusted initial outlay

for issuing the preferred shares are $______ (Round to the nearest dollars

Flotation costs adjusted initial outlay =

2.74*473000

Flotation

costs adjusted initial outlay = 1296020

How should this cost be incorporated into the

NPV of the project being financed?

We can account for flotation costs when

calculating NPV by adjusting the projectâs discount rate

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Nper = 15*2 = 30 (indicates the number of

times the interest payment is made)

FV = 1000 (indicates the face value of bonds)

PV = 947 (indicates the present value of

bonds)

PMT = 1000*13.8%*1/2 = 69 (indicates

semi-annual interest payment)

Rate = ? (indicates the cost of debt)

After Tax Cost of Capital for Bonds= Rate (Nper,PMT,PV,FV)*2*(1-Tax Rate) =

Rate(30,69,-947,1000)*2*(1-34%) =10%

Answer is10%.WRONG

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Calculation of weights of the component

Total value of the firm capital structure =

Value of bonds + Value of preferred stock + Value of common stock

= 480000+140000+450000

=1070000

Weight of bond = Value of bond / Total value

of firm

= 480000/1070000 i.e 44.85%

Weight of preferred stock = Value of preferred

stock / Total value of firm

= 140000/1070000 i.e 13.08%

Weight of common stock = Value of common stock

/ Total value of firm

= 450000/1070000 i.e 42.05%

Calculation of cost of capital

After tax cost of debt = 8.1(1-Tax)

= 8.1( 1-0.34) i.e 5.346WRONG

After tax cost of preferred stock = Preference

dividend ( 1-Tax)

= 7.50(1-0.34) i.e. 4.95 WRONG

Price of common stock = D1/Ke-G

44.85 = 4.06(1+0.044)/Ke-0.044

49.31 = 4.24/Ke-0.044

49.31Ke – 2.16964 = 4.24

Ke = 6.41/49.31 i.e 13%?

WACC =( Weight of debt * Cost of debt)+

(Weight of [preferred stock * Cost of preferred stock) + ( Weight of common

stock * Cost of common stock)

= (0.5047*5.148)+(0.1028*4.95)+(0.3925*13)

= (2.60+0.509+5.10)

= 8.209%?

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a. If sales increase by 20% means increase of

$9156200, consider variable costs also increase with increasing sales by 20%

Thus revenue before fixed cost increase by 20%

to 27588000, thus EBIT is $36854000. Net Income increase by $17725500. EBIT

increase is 41.72% and net income increase is 46.27%WRONG

b. Similarly for second part

EBIT decrease is 41.72% and net income

decrease by 46.27%

c. If firm reduces debt financing, interest

rates cut into half, there will be no effect on EBIT, but net income would

increase by 0.5*(1350000/2) = $337500 after tax

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Return

Probability

Expected return

Deviation

Square Deviation

Rapid

100

5

5

81

65.61

3.2805

Modest

30

50

15

11

1.21

0.605

Continue recession

10

40

4

-9

0.81

0.324

Falls into depression

-100

5

-5

-119

141.61

7.0805

Expected

Return

19

Standard

Deviation

11.29

a)

Expected return is 19

b)

Standard deviation is 11.29 WRONG

c)

Standard deviation is less than expected return.

So it is safe to go into the investment

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