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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

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

b) C requires a calculation, using Excel formulas or functions. You cannot perform


answer in the cell. You will enter the calculation in the cell, and only the final answe
your calculation and correct, if necessary.

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

d) Formula requires a written formula, not the numbers. For example, the rate of re
(debt) + E (equity) = V (value).

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

Instructions

ay need to refer to your textbook for additional information in a few cases.

ded cells.

re references; use the textbook.

r functions. You cannot perform the operation on a calculator and then type the
the cell, and only the final answer will show in the cell. I will be able to review

Step 1 is added to help you solve the problem.

bers. For example, the rate of return = [(1 + nominal)/ (1+inflation)]-1, or D

FINC600-Week#", and submit by midnight ET, Day 7.

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%, a
the companys common stock is .5.

a.
b.

Risk Free Debt

Interest Rate

Market Risk Premium

40%

10%

8%

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

10%
14%
40%
60%

Step 2:
a.

b.

Cost of Capital

Formula (in words)


Cost of Debt multiplied by Debt to Value

WACC

1 minus the Marginal Corporate Tax Rate m

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.

e expected market risk premium is 8%, and the beta of

Beta

Taxes

0.5

35%

at a 35% rate?

TIP: D + E = V

Calculation
12.4%
11%

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

Answer:
What types of firms need to estimate industry asset betas?

According to Brealey, Myers, and Allen (2011), there are certain types of firms which would benefit fro
betas, which is a means of direct project risk measurement. Firms which are considering new investmen
want to asses the risk of this investment and would need to know the asset beta of the industry of that ve
one which wants to set a cost of capital for a specific line of business and would need to estimate the ave
References
Brealey, R.A., Myers, S.C., & Allen, F. (2011). Principles of corporate finance (10th ed.). Boston, MA:

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

According to Brealey, Myers, and Allen (2011), the average risk estimate can be calculated using the ass
calculate the asset beta, the Beta of Debt are multiplied by the Debt to Value Ratio. Then, the Beta of Eq
Ratio are multiplied and are added to the figures previously mentioned.
References
Brealey, R.A., Myers, S.C., & Allen, F. (2011). Principles of corporate finance (10th ed.). Boston, MA:

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

h a firm make the estimate? Describe the process step by step.

s of firms which would benefit from estimating industry asset


ich are considering new investments such as real estate would
asset beta of the industry of that venture. Another type of firm is
and would need to estimate the average asset beta.

e finance (10th ed.). Boston, MA: McGraw-Hill Irwin.

mate can be calculated using the asset beta measurement. To


Value Ratio. Then, the Beta of Equity and Equity to Value
d.

e finance (10th ed.). Boston, MA: McGraw-Hill Irwin.

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 spon
b. Inconsistent forecasts of industry and macroeconomic variables.
c. Capital budgeting organized solely as a bottom-up process.

Answer:
a.

According to Brealey, Myers, and Allen (2011), overoptimism by project spo


forecasts. Events that seem like a certainy are not guaranteed and those which
often understated. This overoptimism can distort the capital budgeting proces
are inaccurate can cause the estimated cash flows of the project to be inaccur
insuffiecient funds to complete it. In addition, overoptimism can cause other,
accurate projects to be filtered out of the running.
References
Brealey, R.A., Myers, S.C., & Allen, F. (2011). Principles of corporate financ
McGraw-Hill Irwin.

b.

According to Brealey, Myers, and Allen (2011), inconsistent forecasts of indu


variables can cause issues with the capital budgeting process. The main issue
variables is that they greatly affect the NPV due to the fact that they can deter
project succeeds or fails, though it is not certain which variable will affect the
variable might be. Inconsistent forecasts can lead to inconsistent cash flows w
project to fail.
References
Brealey, R.A., Myers, S.C., & Allen, F. (2011). Principles of corporate financ
McGraw-Hill Irwin.

c.

According to Brealey, Myers, and Allen (2011) capital budgeting which is org
process can negatively impact the capital budgeting process. Lower leven ma
identify all of the projects which may be worthwhile because they are only sin
considering projects from the bottom-up would cause many tasks to be overlo
loss of profitability or loss of potential to increase profitability.
References
Brealey, R.A., Myers, S.C., & Allen, F. (2011). Principles of corporate financ
McGraw-Hill Irwin.

References
Brealey, R.A., Myers, S.C., & Allen, F. (2011). Principles of corporate financ
McGraw-Hill
Irwin. with your homework. Post your work
Instructions: Please refer to your book
for assistance
in the worksheet. Highlight your final answer.

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

the capital budgeting process.


a. Overoptimism by project sponsors.

011), overoptimism by project sponsors can lead to unrealistic


are not guaranteed and those which might be more risky are
distort the capital budgeting process as project forecasts which
h flows of the project to be inaccurate as well often resulting in
on, overoptimism can cause other, more necessary or more
unning.

011). Principles of corporate finance (10th ed.). Boston, MA:

011), inconsistent forecasts of industry and macroeconomic


budgeting process. The main issue with macroeconomic
V due to the fact that they can determine whether or not the
ertain which variable will affect the project or even what each
an lead to inconsistent cash flows which can also cause the

011). Principles of corporate finance (10th ed.). Boston, MA:

011) capital budgeting which is organized solely as a bottom-up


budgeting process. Lower leven managers are not able to
worthwhile because they are only singularly invested. Only
would cause many tasks to be overlooked resulting in either a
ncrease profitability.

011). Principles of corporate finance (10th ed.). Boston, MA:

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

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 le
b. Now recompute the operating leverage assuming that the entire 33 billion of
Answers:
See page 243, Table 10.1, of textbook for additional information. Copy is also provided below.
Fixed Costs

a.

DOL Formula
1+(Fixed cost + depreciation)/ operating profit

b.

1+(Fixed cost + depreciation)/ operating profit

$33,000,000,000

Principles of Corporate Finance, Concise, 2nd Edition

$0

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

nd that fixed costs are zero.


ge the degree of operating leverage (DOL)?
that the entire 33 billion of costs are fixed.

so provided below.
Calculation
1.5
12.5

Principles of Corporate Finance, Concise, 2nd Edition

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