Instructions
| 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. Essay questions require references; use the textbook. | |
| b) C requires a calculation, using Excel formulas or functions. 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. | |
| d) Formula requires a written formula, not the numbers. For example, the rate of return = [(1 + nominal)/ (1+inflation)]-1, or D (debt) + E (equity) = V (value). | |
| 4. | Name your assignment file as “lastnamefirstinitial-FINC600-Week#”, and submit by midnight ET, Day 7. |
P14-2
| Problem 14-2 | ||
| Assume that MM’s theory holds with taxes. There is no growth, and the $40 of debt is expected to be permanent. Assume a 40% corporate tax rate. a. How much of the firm’s value is accounted for by the debt-generated tax shield? b. How much better off will UF’s a shareholder be if the firm borrows $20 more and uses it to repurchase stock? | ||
| Answer: | ||
| Step 1: | ||
| Tax rate – Tc | F | |
| a. | Permanent Debt – D | F |
| b. | Additional Debt – D | F |
| Step 2: | ||
| Formula (in words) | Calculation | |
| a. Tax shield | T | C |
| b. Tax shield | T | C |
| Benefit to Shareholders | C | TIP: difference between a and b |
Instructions: Please refer to your book for assistance with your homework. Post your work in the worksheet. Highlight your final answer.
Principles of Corporate Finance, Concise, 2nd Edition
P14-24
| Problem 14-24 |
| Some companies’ debt-equity targets are expressed not as a debt ratio, but as a target debt rating on a firm’s outstanding bonds. What are the pros and cons of setting a target rating, rather than a target ratio? |
| Answer: |
| Pros T |
| Cons T |
Instructions: Please refer to your book for assistance with your homework. Post your work in the worksheet. Highlight your final answer.
P15-6
| Problem 15-6 | ||||
| A project costs $1 million and has a base-case NPV of exactly zero (NPV = 0). What is the project’s APV in the following cases? a. If the firm invests, it has to raise $500,000 by a stock issue. Issue costs are 15% of net proceeds. b. If the firm invests, its debt capacity increases by $500,000. The present value of interest tax shields on this debt is $76,000. | ||||
| Answers: | ||||
| Formula (in words) | Calculation | |||
| a. | APV stock issue | T | C | TIP: p.394 |
| b. | APV debt increases | T | C | TIP: p.393 |
Instructions: Please refer to your book for assistance with your homework. Post your work in the worksheet. Highlight your final answer.
Principles of Corporate Finance, Concise, 2nd Edition
P15-9
| Problem 15-9 |
| The WACC formula seems to imply that debt is “cheaper” than equity–that is, that a firm with more debt could use a lower discount rate. Does this make sense? Explain briefly. |
| Answer: |
| T |
Instructions: Please refer to your book for assistance with your homework. Post your work in the worksheet. Highlight your final answer.
