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# A company is 40 financed by risk free debt

Instructions

NAME:

To complete the homework assignments in the templates provided:

1. The question is provided for each problem. You may need to refer to your textbook for additional information in a few cases.

2. You will enter the required information into the shaded cells.

3. The cells are coded:

a. T requires a text answer.

b. C requires a calculation. You cannot perform the operation on a calculator and then type the answer in the cell. You will enter the calculation in the cell, and only the final answer will show in the cell. I will be able to review your calculation and correct, if necessary.

c. F requires a number only. In some problems, a “Step 1” is added to help you solve the problem.

4. Name your assignment file as "lastnamefirstinitial-FINC600-Week#", and submit by midnight ET, Day 7.

&16Instructions

Principles of Corporate Finance, Concise, 2nd Edition

P9-2

Problem 9-2

A company is 40% financed by risk-free debt. The interest rate is 10%, the expected market risk premium is 8%, and the beta of the company’s common stock is .5.

Risk Free Debt Interest Rate Market Risk Premium Beta Taxes

40% 10% 8% 0.5 35%

a. What is the company cost of capital?

b. What is the after-tax WACC, assuming that the company pays tax at a 35% rate?

Step 1:

r(d)= F

r(e)= C TIP: D + E = V

D/V C

E/V C

Step 2:

a. Formula Calculation

Cost of Capital T C

b. WACC T C

Principles of Corporate Finance, Concise, 2nd Edition

P9-16

Problem 9-16

What types of firms need to estimate industry asset betas? How would such a firm make the estimate? Describe the process step by step.

What types of firms need to estimate industry asset betas? T

How would such a firm make the estimate? Describe the process step by step. T

P10-2

Problem 10-2

Explain how each of the following actions or problems can distort or disrupt the capital budgeting process. a. Overoptimism by project sponsors. b. Inconsistent forecasts of industry and macroeconomic variables. c. Capital budgeting organized solely as a bottom-up process.

a. T

b. T

c. T

P10-14

Problem 10-14

Suppose that the expected variable costs of Otobai’s project are ¥33 billion a year and that fixed costs are zero. How does this change the degree of operating leverage (DOL)? Now recompute the operating leverage assuming that the entire ¥33 billion of costs are fixed.

Answers: See page 243, Table 10.1, of textbook for additional information. Copy is also provided below.

DOL Formula Project Costs Calculation

Fixed cost 1+Fixed cost + depreciation/ operating profit F C

Variable cost 1+Fixed cost + depreciation/ operating profit F C

Principles of Corporate Finance, Concise, 2nd Edition

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