Get the recipe of your success

FINANCE24.US

Financial Management Chapter 11 answer

 

Chapter 11

 The Cost of Capital

Solutions to Problems

P11-1. LG 1:Concept ofCost ofCapital Basic(a) The firm isbasing itsdecision onthe costto financea particularproject ratherthan thefirm’scombined cost of capital. This decision-making method may lead to erroneous accept/rejectdecisions.(b) k 

a

=

w

d

d

+

w

e

e

a

=

0.40 (7%)

+

0.60(16%)k 

a

=

2.8%

+

9.6%k 

a

=

12.4%(c) Rejectproject263.Acceptproject264. (d) Opposite con clusions w ere drawn usi ng the t wo decisioncriteria. Theoverall costof capital as a criterion provides better decisions because it takes into consideration the long-runinterrelationship of financing decisions.P11-2. LG 2: Co st of Deb t UsingBoth Methods Intermediate(a) NetProceeds:N

d

=

$1,010

$30N

d

=

$980( cC o s tt oM a t u r i t y : )

notnt1

IMB( 1k )( 1k )

=

⎡⎤⎤=⎢⎥⎥++⎣⎦ ⎣⎦

⎡+⎢

15

$120

⎡−

t15t1

$1,000$980( 1k )( 1k )

=

⎤⎡⎤−=+⎢⎥ ⎢⎥ ++⎣⎦ ⎣⎦

Step 1:

Try 12%

×

(0.183)VIF, the value of the bond is 32 cents greater than expected. At thecoupon ondis$1,000.)V

=

120

×

(6.811)

+

1,000V

=

817.32

+

183V

=

$1,000.32(Due to rounding of the Prate, the value of a $1,000 face value b

 

282 Part4 Long-TermFinancialDecisions

Try 13%:V

=

120

×

(6.462)

+

1,000

×

(0.160)maturity is between 12% and 13%.

Step 2:Step 3:

0

=

$20.32

Step 4:

88

=

0.31

Step 5:

r-tax cost of debt(d) ebtV

=

775.44

+

160V

=

$935.44The cost to$1,000.32

$935.44

=

$64.88$1,000.32

$980.0$20.32

÷

$64.12

+

0.31

=

12.31%

=

before-tax cost of debt12.31 (1

0.40)

=

7.39%

=

afteCalculator solution: 12.30%Approximate before-tax cost of d

d

$ 1 ,0 0 0NI

−+

dd

k N$ 1 , 0 0 0

=+

n 2 

d

($1,000$12015k ( $ 9 8 0$ 1 ,0$980)0)2

−+=+

 debt

=

12.26%

×

(1

0.4)

=

7.36%(e) edcostofdebtisclosertotheactualcost(12.2983%)thanusingthe However, the short cut approximation is fairly accurate andP11-3. 20k 

d

=

$121.33

÷

$990.00k 

d

=

12.26%Approximate after-tax cost of The interpolatapproximating equation.expedient.LBasicG: Cos t ofDebt– Usin g theAppro xima tionFormu la:

d

NI2

−+

ond A

$1,000

dd

nk N$ 1 , 0 0 0

=+

i

=

d

×

(1

T)

B

 

Chapter11 TheCostofCapital 283

d

$ 1 ,0 0 0$ 9 5 5 $92.2520k9 . 4 4 %$ 9 5 5$ 1 ,0 0 0 $977.502

−+===+

 k 

i

=

9.44%

×

(1

0.40)

=

5.66%$90

Bond B

d

$ 1 ,0 0 0$ 9 7 0 $101.8816k1 0 . 3 4 % $ 9 7 0$ 1 ,0 0 0 $9852

−+===+

 k 

i

=

10.34%

×

(1

0.40)

=

6.20%$100

Bond C

d

$ 1 ,0 0 0$ 9 5 5 $12315k1 2 . 5 8 % $ 9 5 5$ 1 ,0 0 0 $977.502

−+===+

 k 

i

=

12.58%

×

(1

0.40)

=

7.55%$120

Bond D

d

$ 1 ,0 0 0$ 9 8 5 $90.6025k9 . 1 3 %$ 9 8 5$ 1 ,0 0 0 $992.502

−===+

 k 

i

=

9.13%

×

(1

0.40)

=

5.48%$90

+

Bond E

d

$ 1 ,0 0 0$ 9 2 0 $113.6422k1 1 . 8 4 % $ 9 2 0$ 1 ,0 0 0 $9602

−+===+

 k 

i

=

11.84%

×

(1

0.40)

=

7.10%$110


Category: Financial management

Similar articles: