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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 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. Essay questions require references; use the textbook.

b) C requires a calculation, using Excel formulas or functions. You cannot perform the calculator and then type the answer in the cell. You will enter the calculation in the cell final answer will show in the cell. I will be able to review your calculation and correct, if

c) F requires a number only. In some problems, a Step 1 is added to help you solve t

d) Formula requires a written formula, not the numbers. For example, the rate of return nominal)/ (1+inflation)]-1, or D (debt) + E (equity) = V (value).

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

ions

efer to your textbook for additional

s; use the textbook.

You cannot perform the operation on a he calculation in the cell, and only the alculation and correct, if necessary.

dded to help you solve the problem.

ample, the rate of return = [(1 +

eek#", and submit by midnight ET, Day

Instructions: Please refer to your book for assistance with your homework. Post your work in the worksheet. Highlight your final answer.

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 companys common stock is .5.

Risk Free Debt 40% a. b.

Interest Rate 10%

Market Risk Premium 8%

Beta 0.5

Taxes 35%

What is the company cost of capital? What is the after-tax WACC, assuming that the company pays tax at a 35% rate?

Answers: Step 1: r(d)= r(e)= D/V E/V Step 2: a. Cost of Capital b. WACC T T

F C C C

TIP: D + E = V

Formula (in words)

Calculation C C

Principles of Corporate Finance, Concise, 2nd Edition

Instructions: Please refer to your book for assistance with your homework. Post your work in the worksheet. Highlight your final answer.

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.

Answer: 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

Instructions: Please refer to your book for assistance with your homework. Post your work in the worksheet. Highlight your final answer.

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.

Answer: a. T

b.

c.

Instructions: Please refer to your book for assistance with your homework. Post your work in the worksheet. Highlight your final answer.

Problem 10-14 Suppose that the expected variable costs of Otobais project are 33 billion a year and that fixed costs are zero. a. 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 1+(Fixed cost + depreciation)/ operating profit 1+(Fixed cost + depreciation)/ operating profit Fixed Costs F F C C Calculation

b.

a. b.

Principles of Corporate Finance, Concise, 2nd Edition

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