Masters Level Finance- Financing and Valuation Assignment
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. |
&C&"Calibri,Regular"&16Instructions
&C&"Calibri,Regular"&11Principles of Corporate Finance, Concise, 2nd Edition
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 | Calculation | ||
| a. Tax shield | T | C | |
| b. Tax shield | T | C | |
| Benefit to Shareholders | F | TIP: difference between a and b |
&L&"Calibri,Regular"&11Instructions: Please refer to your book for assistance with your homework. Post your work in the worksheet. Highlight your final answer.
&C&"Calibri,Regular"&11Principles 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 |
&L&"Calibri,Regular"&11Instructions: 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: | ||
| Calculation | ||
| a. | APV stock issue | C |
| b. | APV debt increases | C |
&L&"Calibri,Regular"&11Instructions: Please refer to your book for assistance with your homework. Post your work in the worksheet. Highlight your final answer.
&C&"Calibri,Regular"&11Principles 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 |
&L&"Calibri,Regular"&11Instructions: Please refer to your book for assistance with your homework. Post your work in the worksheet. Highlight your final answer.