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Question 35

Equity Ke
MV per share 1.25 Dividend 0.10
Shares 1,000,000 Growth rate 10%
Total Equity 1,250,000 Ke 18.80%

Debt Kd
MV of Bonds 85% Interest 0.15
Face Value 150,000 Tax 33%
MV of total Bonds 127,500 Kd 11.82%

Pref Shares KP
MV of Pref Shares 65% Dividend 7%
Face Value 250,000 KP 10.77%
MV of total Pref Shares 162,500

Total Capital 1,540,000


WACC 17.3750%

Question 37
Floatation cost 4%
Div yr 1 1.50
Growth rate 4%
MV per share 10
Ke 19.63%

MV of Debt 100
Tax rate 40%
Coupon rate 12.5%

Kd
- (96)
1 7.50
2 7.50
3 7.50
4 7.50
5 7.50
6 7.50
7 107.50
8.28%
MV of Equity 2,500,000
MV of Debt 2,500,000
Ke 19.63%
Kd 8.28%
WACC 13.950%

Question 38

MV per share 180


Dividend 15
Growth rate 12%
Investments 2,000,000
Inflows 1,000,000
Term 3 years

Ke 21.333% D54*(1+D55)/D53+D55

Net Present Value


Initial outlay (2,000,000)
PV of inflows 2,063,276
NPV 63,276

With Floation cost

MV per share 180


Dividend 15
Growth rate 12%
Investments 2,000,000
Inflows 1,000,000
Term 3 years

Ke 21.825% adjusted in rate

Net Present Value


Initial outlay (2,000,000)
PV of inflows 2,047,741
NPV 47,741
With Floation cost

MV per share 180


Dividend 15
Growth rate 12%
Investments 2,000,000
Inflows 1,000,000
Term 3 years

Ke 21.333%

Net Present Value


Initial outlay (2,105,263)
PV of inflows 2,063,276
NPV (41,987)

Question 39

Ke Ke
MV per share 36 MV per share 36
Dividend Per share yr 1 2 Dividend Per share yr 1 2
Grwoth rate 5% Grwoth rate 5%
Floatation cost 4.50% Floatation cost 4.50%
Ke 10.82% Ke 10.56%

Kd 6.50% Kd 6.50%
Tax 35.00% Tax 35.00%
Kd after tax 4.23% Kd after tax 4.23%

WACC 7.52% WACC 7.39%

Initial outlay (400,000) Initial outlay (409,424)


PV of inflows 502,161 PV of inflows 503,637
102,161 94,213
Question 1

Current share price 11


Growth rate 10%
Time to maturity 4
Shares 8
MV at redemption /share 16.11
Total Value at redemption 129

Conversion is expected to be beneficial

Question 2

Current price 9
Shares 15
Conversion now 135

Futire cash flows


Yr CF PV at 10%'
1 14 13
2 14 12
3 14 11
4 114 78
113

Conversion is better today than holding the bond

Question 3

Current Share price 4.25


Shares 16
MV today 68

Cash price at redemption 110


Growth rate required 12.78%

Question 4
Fair Value 142
Shares 30
Face Value 100
Coupon rate 10%
Required rate 12%
Time to maturity 4

Future value 223


From interest (48)
From redemption 176
Current Amount 125
Growth rate required 8.99%

Question 5

Market Value today 95


Coupon rate 12%
Cash price on redemption 110

Current share price 5.85


Growth rate 5.50%
Shares per Rs 100 16
Conversion value 116
Converion would be better

So cash flows would be


Yr CF
- (95)
1 9.00
2 9.00
3 9.00
4 124.95
13.96%

Question 45

Yr CF PV at 10%
1 9.00 8.18
2 9.00 7.44
3 9.00 6.76
4 9.00 6.15
5 9.00 5.59
6 130.47 73.65
Market Value 108

Cash price at end 100


Share price at end 121

Yr CF PV at 10%
1 9.00 8.18
2 9.00 7.44
3 9.00 6.76
4 9.00 6.15
5 9.00 5.59
6 109.00 61.53
Floor Value 96

Assuming that the conversion will be in cash

Conversion premium
Value of shares today 96.00
Market value today 108
Conversion premuim 11.76

Question 46

Yr CF PV at 7%
1 9.00 8.41
2 9.00 7.86
3 9.00 7.35
4 9.00 6.87
5 123.50 88.05
Market Value 119

Cash price at end 100


Share price at end 114
Yr CF PV at 7%
1 9.00 8.41
2 9.00 7.86
3 9.00 7.35
4 9.00 6.87
5 9.00 6.42
6 109.00 72.63
Floor Value 110

Assuming that the conversion will be in cash

Conversion premium
Value of shares today 89.00
Market value today 119
Conversion premuim 29.54
Question 1 Question 2

PBIT 2,000 PBIT 2,000


Interest (400) Interst (400)
Net Profit 1,600 PBT 1,600
Tax @ 30% (480)
Debt 4,000 PAT 1,120
Equity 11,430
15,430 Debt 4,000
Equity 11,430
Ke (Dvd/Equity) 14.00% 15,430
Kd (Intr/Debt) 10.00%
Ke (Dvd/Equity) 9.80%
WACC 12.962% Kd (Intr/Debt) 7.00%

Alternativly WACC 9.073%

PBIT 2,000 Alternatively


Market value 15,430 PBIT 2,000
WACC 12.96% Tax (600)
After Tax 1,400

Market Value 15,430


WACC 9.073%

Question 52
PBIT 2,500
PBIT 2,500 Interest (500)
Interest (500) PBT 2,000
Net profit 2,000 Tax @ 30% (600)
PAT 1,400
MV of Equity 10,000
MV of Debt 6,250 MV of Equity 10,000
MV of Debt 6,250
Ke 20.00%
Kd 8.00% Ke 14.00%
Kd (after tax) 5.60%
WACC 15.38%
WACC 10.77%

Alternatively
PBIT 2,500 PBIT (1-t) 1,750
MV of company 16,250 MV of company 16,250
WACC 15.38% WACC 10.77%

Question

MV of Equity 2,900,000 Alternatively


Since new project is not changing business risk and
New project financial risk, so WACC remains the same
Finance Required 760,000 We are assuming tha the company pays all its
Inflows (till perpetuity) 140,000 earnings as dividends
Discount rate 12.50%
MV of equity 2,900,000
NPV of the project WACC or Ke 12.50%
Initial outlay (760,000) Dividend (Bal fig) or PBIT 362,500
PV of inflows 1,120,000
NPV 360,000 Old PBIT 362,500
Further Income 140,000
MV of company after project New PBIT 502,500
Old MV 2,900,000
New finance rasied 760,000 MV of company 4,020,000
NPV 360,000
New market Value 4,020,000

Number of shares
Old shares 200,000
New Share 52,414
Total Shares 252,414
MV per share 15.93

Gain per share 1.43


Shares 252,414
NPV 360,000

Question

MV of Equity 400,000
MV of Debt 250,000

New project
Initial finance reqrd 180,000
NPV 75,000

Debt raised 90,000


Equity raised 90,000

Post project MV
Equity Debt
Old MV 400,000 250,000
New funds raised 90,000 90,000
NPV 75,000 -
565,000 340,000

Question
Inflows 1,530,000
Capital required 6,000,000

Ke 21%
Kd 9%
Ratio
Equity 10,000,000 66.67%
Debt 5,000,000 33.33%
Company capital 15,000,000

WACC 17.00%

To keep the WACC constant

Outlay (6,000,000)
PV of inflows 9,000,000
Net present value 3,000,000

Distribution of equity / debt

Debt 3,000,000
Equity 3,000,000

Post project Ratio


Debt 8,000,000 33.33%
Equity (incl NPV) 16,000,000 66.67%
24,000,000

Now WACC can be used as discount rate


Question

MV per share 2.50


Shares 100 Million
MV of equity 250.00
MV of bonds 104
Face value 60 Million
MV of debt 62.40
Kd(aftr tax) 7%
Tax 30%

Dvd latest 0.22


Dvd ref 0.19
Time 4

Growth rate 2.99%


Ke 11.97%

WACC 10.97%

After debt

Debt 40
Cost of Debt
- (100)
1 5.60
2 5.60
3 5.60
4 5.60 WACC cant be used as DR
5 5.60 as it changed
6 5.60
7 5.60
8 5.60
9 5.60
10 110.60
5.980%

New WACC 10.407%


Question

Market value per share 2


Shares 1,000
MV of equity 2,000

Dvd Latest 0.11


Dvd refernce 0.07
Growth rate 11.1%
Ke 16.90%

Debt market Value 75


Debt market Value 450
Tax Rate 30%
Coupon rate 8%

Kd (after tax) 7.47%

Bank loan 300


Kd (after tax) 7.0%

WACC 14.275%

Question

Inflows 60,000
Capital required 250,000

Ke 19%
Kd 9%
Ratio
Equity 1,800,000 60.00%
Debt 1,200,000 40.00%
Company capital 3,000,000

WACC 15.00%

To keep the WACC constant


Outlay (250,000)
PV of inflows 400,000
Net present value 150,000

Distribution of equity / debt

Debt 160,000
Equity 90,000

Post project Ratio


Debt 1,360,000 40.00%
Equity (incl NPV) 2,040,000 60.00%
3,400,000

Now WACC can be used as discount rate


Question

PBIT 400,000
Interest (150,000)
Net Profit 250,000

Kd 10%
Ke 16%

MV of Debt 1,500,000
MV of Equity (Calculated) 1,562,500
Market value of firm 3,062,500

WACC (calculated) 13.061%

Company is issuing Equity to redeem Debt

PBIT 400,000
Interest (100,000)
Equity 300,000

Kd 10%
Ke 14%

MV of Debt 1,000,000
MV of Equity (Calculated) 2,142,857
Market value of firm 3,142,857

WACC (calculated) 12.727%

Increase in wealth 80,357

Question
Base case Case 1 Case 2 Case 3 Case 4
PBIT 450,000 450,000 450,000 450,000 450,000
Interest - (60,000) (150,000) (220,000) (350,000)
Net profit 450,000 390,000 300,000 230,000 100,000
MV of Debt - 600,000 1,500,000 2,000,000 2,500,000
MV of Equity 3,000,000 2,516,129 1,714,286 1,095,238 400,000
MV of Firm 3,000,000 3,116,129 3,214,286 3,095,238 2,900,000

Ke 15.00% 15.50% 17.50% 21.00% 25.00%


Kd 0.00% 10.00% 10.00% 11.00% 14.00%
WACC 15.00% 14.44% 14.00% 14.54% 15.52%
Question 1

Stage Step Equity Debt Ke Kd WACC


1 Initialy 100 - 15.00% 0.00% 15.00%
2 Some Debt added 80 20 16.25% 10.00% 15.00%
3 Some Debt added 60 40 18.33% 10.00% 15.00%
4 Further debt added 40 60 22.50% 10.00% 15.00%
5 Further debt added 20 80 35.00% 10.00% 15.00%

Question 60

Shares in issue 200,000


MV per share 12
MV of Equity 2,400,000

MV of debt 1,000,000

Ke 15%
Kd 9%

WACC 13.235%
MV of the firm 3,400,000

Debt introduction

Tradtional Theory

MV of debt 1,400,000

Ke 17.50%
Kd 9.00%

MV of equity Old New


PBIT (prev) 450,000 450,000
Interest (90,000) (126,000)
Equity 360,000 324,000
Ke old 15.00% 16.00%
MV Old 2,400,000 ###
New value of firm
Equity 2,025,000
Debt 1,400,000
3,425,000
Old Market Value 3,400,000
Increase in wealth 25,000

New WACC 13.14%

MM Theory

Keg 15.000% 15.000%


Kd 9% 9%
Debt 1,000,000 ###
Equity 2,400,000 ###
3,400,000 ###

We all know that Keu = WACC

Keg 15.00% 16.20%

Question 61

MV of equity 200,000

Keu 20%

Debt introduction
Debt Capital 100,000
Equity Capital 100,000
200,000

Keg 30.00%
Kd 10.00%
WACC 20.00%

Question 62

Debt Capital 1,600,000


Equity Capital 2,400,000
4,000,000

Ke 15%
Kd 10%
WACC 13.00%

New propositions
Equity 2,800,000
Debt 1,200,000
4,000,000

Ke 14%
Kd 10%
WACC 13.00%
Question 63

A B
PBIT 400,000 640,000 Find PBITs for both companies
Interest (100,000) (300,000) Find dividend for B (using Ke = given and MV of Equity = given)

Net Profit 300,000 340,000 Find interest for A and using Kd= (given) find MV of Debt

Find MV of A (total) using 1.6 multiple by company B market value


Equity ### ### Find Dividend of A and than MV of A and than Ke
Debt ### ###
Firm Value ### ###

Ke 20.00% 34.00%
Kd 10.00% 10.00%
WACC 16.00% 16.00%

Question 64

Current Values

X Y
PBIT 150,000 150,000
Interest (20,000) -
Net Profit 130,000 150,000

Equity ### ###


Debt 400,000 -
Firm Value ### ###

Ke 13.00% 12.00%
Kd 5.00% 0.00%
WACC 10.71% 12.00%

Equilibrium Values

X Y
PBIT 150,000 150,000
Interest (20,000) -
Net Profit 130,000 150,000

Overall WACC 12.50% 12.50%


Kd 5.00% 0.00%
MV total ### ###
Debt 400,000 -
Equity 800,000 ###

Ke 16.25% 12.50%

Ke Through Function
Keu 12.50%
Kd 5.00%
D/E 0.5000
Keg 16.250%

Question 65

A B
PBIT 10,000 10,000
Interest - (1,600)
Net Profit 10,000 8,400
Always calculated
Ke 20.00% 17.50% using MV of Debt
and equity in
Kd 0.00% 5.00% arbitrg gain
WACC 20.00% 12.50% question

Equity 50,000 48,000


Debt - 32,000
Firm Value 50,000 80,000
Situation Under Vlud Over Valud

Migrattion

Investment at 10% holding 4,800


Current Income 840

Moving to A
Loan obtained 3,200
Current Investm 4,800
Invest in A 8,000

Returns 1,600
Interest paid on loan (160)
Net Income 1,440

Arbitrage gains 600


Arbitrage Gains dried up
A B
PBIT 10,000 10,000
Interest - (1,600)
Net Profit 10,000 8,400
Always calculated
Ke 16.00% 27.54% using MV of Debt
and equity in
Kd 0.00% 5.00% arbitrg gain
WACC 16.00% 16.00% question

Equity 62,500 30,500


Debt - 32,000
Firm Value 62,500 62,500
Situation

Migrattion

Investment at 10% holding 3,050


Current Income 840

Moving to A
Loan obtained 3,200
Current Investm 3,050
Invest in A 6,250

Returns 1,000
Interest paid on loan (160)
Net Income 840

Arbitrage gains -

Question 66

A B
PBIT 10,000 10,000
Interest - (1,600)
Net Profit 10,000 8,400
Always calculated
Ke 14.29% 22.11% using MV of Debt
and equity in
Kd 0 5.00% arbitrg gain
WACC 14.29% 14.29% question

Equity 70,000 38,000


Debt - 32,000
Firm Value 70,000 70,000
Situation

Migrattion

Investment at 10% holding 3,800


Current Income 840

Moving to A
Loan obtained 3,200
Current Investm 3,800
Invest in A 7,000

Returns 1,000
Interest paid on loan (160)
Net Income 840

Arbitrage gains -

Question 67

A B
PBIT 18,000 18,000
Interest - (3,600)
Net Profit 18,000 14,400
Always calculated
Ke 12.00% 13.33% using MV of Debt
and equity in
Kd 0 6.00% arbitrg gain
WACC 12.00% 10.71% question

Equity 150,000 108,000


Debt - 60,000
Firm Value 150,000 168,000
Situation
Migrattion

Investment at 10% holding 10,800


Current Income 1,440

Moving to A
Loan obtained 6,000
Current Investm 10,800
Invest in A 16,800

Returns 2,016
Interest paid on loan (360)
Net Income 1,656

Arbitrage gains 216

Question 68

PBIT 7,500 7,500


Intrst - (1,500)
7,500 6,000
Tax (2,250) (1,800)
5,250 4,200

Equity 26,250 15,750


Debt - 15,000
Company 26,250 30,750

Ke 20% 27%
Kd 10% 10%
WACC 20% 17%
Equity = given)

ny B market value
Arbitrage gains MM Theory with Taxes
Arbitrage (Geared to Ungeared) No Arbitrage (Geared to Ungeared) Arbitrage (Ungeared to Geared) No Arbitrage (Ungeared to Geared)
PBIT 500,000 500,000 PBIT 500,000 500,000 PBIT 500,000 500,000 PBIT 500,000 500,000
Interst - (100,000) Interst - (100,000) Interst - (100,000) Interst - (100,000)
PBT 500,000 400,000 PBT 500,000 400,000 PBT 500,000 400,000 PBT 500,000 400,000
Tax (150,000) (120,000) Tax (150,000) (120,000) Tax (150,000) (120,000) Tax (150,000) (120,000)
PAT 350,000 280,000 PAT 350,000 280,000 PAT 350,000 280,000 PAT 350,000 280,000

Equity 1,750,000 1,300,000 Equity 1,750,000 1,050,000 Equity 2,000,000 1,050,000 Equity 1,750,000 1,050,000
Debt - 1,000,000 Debt - 1,000,000 Debt - 1,000,000 Debt - 1,000,000
Copmany 1,750,000 2,300,000 Copmany 1,750,000 2,050,000 Copmany 2,000,000 2,050,000 Copmany 1,750,000 2,050,000

Ke 20.00% 21.54% Ke 20.00% 26.67% Ke 17.50% 26.67% Ke 20.00% 26.67%


Kd 0.00% 10.00% Kd 0.00% 10.00% Kd 0.00% 10.00% Kd 0.00% 10.00%
WACC 20.00% 15.22% WACC 20.00% 17.07% WACC 17.50% 17.07% WACC 20.00% 17.07%

Holding 10% in B Holding 10% in B Holding 10% in A Holding 10% in A


Investment 130,000 Investment 105,000 Investment 200,000 Investment 175,000

Current Income 28,000 Current Income 28,000 Current Income 35,000 Current Income 35,000

Investment in A Investment in A Investment in B Investment in B


Equity 130,000 Equity 105,000 Equity 120,000 Equity 105,000
Debt 70,000 Debt 70,000 Debt 80,000 Debt 70,000
200,000 175,000 200,000 175,000

My proposed income 40,000 My proposed income 35,000 Income as SH 32,000 Income as SH 28,000
Interest (7,000) Interest (7,000) Income as DH 8,000 Income as DH 7,000
33,000 28,000 40,000 35,000

Arbitrage Gain 5,000 Arbitrage Gain - Arbitrage Gain 5,000 Arbitrage Gain -
Arbitrage gains MM Theory without Taxes
Arbitrage (Geared to Ungeared) No Arbitrage (Geared to Ungeared) Arbitrage (Ungeared to Geared) No Arbitrage (Ungeared to Geared)
PBIT 500,000 500,000 PBIT 500,000 500,000 PBIT 500,000 500,000 PBIT 500,000 500,000
Interst - (100,000) Interst - (100,000) Interst - (100,000) Interst - (100,000)
PBT 500,000 400,000 PBT 500,000 400,000 PBT 500,000 400,000 PBT 500,000 400,000

Equity 3,125,000 2,300,000 Equity 3,125,000 2,125,000 Equity 4,000,000 2,800,000 Equity 4,000,000 3,000,000
Debt - 1,000,000 Debt - 1,000,000 Debt - 1,000,000 Debt - 1,000,000
Copmany 3,125,000 3,300,000 Copmany 3,125,000 3,125,000 Copmany 4,000,000 3,800,000 Copmany 4,000,000 4,000,000

Ke 16.00% 17.39% Ke 16.00% 18.82% Ke 12.50% 14.29% Ke 12.50% 13.33%


Kd 0.00% 10.00% Kd 0.00% 10.00% Kd 0.00% 10.00% Kd 0.00% 10.00%
WACC 16.00% 15.15% WACC 16.00% 16.00% WACC 12.50% 13.16% WACC 12.50% 12.50%

Holding 10% in B Holding 10% in B Holding 10% in A Holding 10% in A


Investment 230,000 Investment 212,500 Investment 400,000 Investment 400,000

Current Income 40,000 Current Income 40,000 Current Income 50,000 Current Income 50,000

Investment in A Investment in A Investment in B Investment in B


Equity 230,000 Equity 212,500 Equity 294,737 Equity 300,000
Debt 100,000 Debt 100,000 Debt 105,263 Debt 100,000
330,000 312,500 400,000 400,000

My proposed income 52,800 My proposed income 50,000 Income as SH 42,105 Income as SH 40,000
Interest (10,000) Interest (10,000) Income as DH 10,526 Income as DH 10,000
42,800 40,000 52,632 50,000

Arbitrage Gain 2,800 Arbitrage Gain - Arbitrage Gain 2,632 Arbitrage Gain -
Question 69
Now Case 1 Case 2 Case 3 Case 4
PBIT 500,000 500,000 500,000 500,000 500,000
Interest - (40,000) (80,000) (125,000) (150,000)
PBT 500,000 460,000 420,000 375,000 350,000
Tax (150,000) (138,000) (126,000) (112,500) (105,000)
PAT 350,000 322,000 294,000 262,500 245,000

Ke 17.50% 18.72% 20.42% 23.33% 25.79%


Kd 0.00% 10.00% 10.00% 10.00% 10.00%
WACC 17.50% 16.51% 15.63% 14.74% 14.29%

Equity ### ### ### 1,125,000 950,000


Debt - 400,000 800,000 1,250,000 1,500,000
MV of Comp ### ### ### 2,375,000 2,450,000

Equity Alternative
Opening ### ### ### 2,000,000 2,000,000
Less Debt - (400,000) (800,000) ### ###
Add Tax Benefit - 120,000 240,000 375,000 450,000
Closing ### ### ### 1,125,000 950,000
Question 70

Equity
Shares 2,000
MV per shares 4.20
Equity 8,400

PBIT 2,500
Interst -
PBT 2,500
Tax (825)
PAT 1,675

Ke 19.94%
Kd 0.00%
WACC 19.94%

4 Million 2 Million
Equity 8,400 8,400
Debt (4,000) ###
Tax Benefits 1,320 660
5,720 7,060

PBIT 2,500 2,500


Interst (400) (200)
PBT 2,100 2,300
Tax (693) (759)
PAT 1,407 1,541

Ke 24.60% 21.83%
Kd 10% 10%
WACC 17.23% 18.49%

Alternatively
Keg 24.60% 21.83%
WACC 17.23% 18.49%
Question 71

D0 0.12
g 0.08
MV 1.20
Ke 18.80%

Kd 10.00%

Debt 30,000
Equity 120,000
150,000

WACC 16.44%

Right Issue Debt Increase


Equity 120,000 Equity 120,000
Further 15,000 Further (15,000)
Loss of TB (4,500) Loss of TB 4,500
130,500 109,500

Equity 130,500 Equity 109,500


Debt 15,000 Debt 45,000
145,500 154,500

Find Ke u
WACC 0.16 WACC 15.961%
DxT 9,000 Keg 19.64%
E+D 150,000
Keu 17.489% WACC 15.961%

Keg
DxT 4,500
E+D 145,500
WACC 16.95%

Ke 18.80%
Question 73

Reverse arbitrage
Lowa Arizona
PBIT 2,500 2,500
Interest (360) -
PBT 2,140 2,500
Tax (642) (750)
PAT 1,498 1,750

Equity 6,600 ###


Debt 4,000 -
Firm Value 10,600 ###

Ke 22.70% 15.09%
Kd 9.00% 0.00%
WACC 16.51% 15.09%

MV of geared Compan MV of Ungeared Company


MV u 11,600 MV g ###
Debt Sheild 1,200 Debt Sheild ###
12,800 9,400
MVg (10,600) MV U ###
Over Valued 2,200 Under Valued ###
Question

PBIT 400,000 400,000 400,000


Interest - (40,000) (87,500)
PBT 400,000 360,000 312,500
Tax (120,000) (108,000) (93,750)
PAT 280,000 252,000 218,750

Ke 16.00% 17.14% 19.23%


kd 10.00% 10.00% 10.00%
WACC 16.00% 14.97% 13.91%

Equity ### ### ###


Debt - 400,000 875,000
Company ### ### ###

Equity Balance
Original ### ###
Debt (400,000) (875,000)
Tax benefits 120,000 262,500
### ###

Alter WACC
Keu 16.00% 16.00%
Debt 400,000 875,000
Equity ### ###
New WACC 14.97% 13.913%
Question 70
Current 2 Million 4 Million
PBIT 2,500 2,500 2,500
Interest - (200) (400)
PBT 2,500 2,300 2,100
Tax (825) (759) (693)
PAT 1,675 1,541 1,407

Equity 8,400 7,060 5,720


Debt - 2,000 4,000
Company 8,400 9,060 9,720

Keu 19.94% 21.83% 24.60%


Kd 10.00% 10.00% 10.00%
WACC 19.94% 18.49% 17.23%

Rates Aternative

Keg
Keu 19.94% 19.94%
Equity 7,060 5,720
Debt 2,000 4,000
Keg 21.83% 24.60%

WACC
Keu 19.9%
Equity 7,060
Debt 2,000
WACCg 18.49%

Question

Div 12.00%
Growth 8.00%
Price 1
Ke 18.80%
Kd 10.00%
WACC 17.04%

Issuing Right Shares


Equity 120,000 Equity 120,000
Debt 30,000 Debt released 15,000
Company 150,000 Tax benef Lost (4,500)
Equity Balance 130,500
Go back and Calculate KeDebt 15,000
145,500
WACC g 17.04%
Equity 120,000 Keg 18.78%
Debt 30,000
Company 150,000

Keu 18.13%
Question 1

Expected Returns

Prob ER Ret A
20% 12 2.40
30% 15 4.50
50% 18 9.00
15.90

Question 2

Prob ER Ret A Prob ER Ret B


30% 24 7.20 30% 18 5.40
40% 16 6.40 40% 16 6.40
30% 8 2.40 30% 14 4.20
16.00 16.00

SD A SD B
(x-x) (X-x)2 P(X-x) (x-x) (X-x)2 P(X-x)
8.00 64 19.20 2.00 4 1.20
0.00 - 0.00 0.00 - 0.00
-8.00 64 19.20 -2.00 4 1.20
38.40 2.40
SD (Root) 6.20 SD (Root) 1.55

Question 3

Prob ER Ret A
10% 5 0.50
30% 12 3.60
15% 9 1.35
45% 24 10.80
16.25

SD A
(x-x) (X-x)2 P(X-x)
### 127 12.66
(4.25) 18 5.42
(7.25) 53 7.88
7.75 60 27.03
52.99
SD (Root) 7.28

Question

Year J Ltd M Ltd


1 18 9
2 15 20
3 15 8
4 17 24
5 20 24

Avg 17.00 17.00

SD J SD J
(x-x) (x-x)^2 (x-x) (x-x)^2
1.00 1.00 -8.00 64.00
-2.00 4.00 3.00 9.00
-2.00 4.00 -9.00 81.00
0.00 0.00 7.00 49.00
3.00 9.00 7.00 49.00
18.00 252.00
Per year 3.60 Per year 50.40
SD (Root 1.90 SD (Root 7.10

2 Asset portfolio
Sec ER Weight WAR
X 24 35% 8.40
Y 16 65% 10.40
18.80

Question 6

Sec SD Weight
A 8 60%
B 12 40%
Perfect positive Perfect Negative Zero Corelation

First Part First Part First Part


Sec SD Weight Sec SD Weight Sec
A 64 36% 23.04 A 64 36% 23.04 A
B 144 16% 23.04 B 144 16% 23.04 B
46 46

2nd Part 2nd Part 2nd Part


SD A 8 SD A 8 SD A
SD B 12 SD B 12 SD B
Weight A 1 Weight A 1 Weight A
Weight B 0 Weight B 0 Weight B
Corel 1 Corel (1) Corel
Product 46 Product (46) Product

Total 92 Total - Total


Root 9.60 Root 0.00 Root

Question 7

Sec SD Weight
A 6 40%
B 10 60%

Perfect positive Perfect Negative Zero Corelation

First Part First Part First Part


Sec SD Weight Sec SD Weight Sec
A 36 16% 5.76 A 36 16% 5.76 A
B 100 36% 36.00 B 100 36% 36.00 B
41.76 42

2nd Part 2nd Part 2nd Part


SD A 6.00 SD A 6.00 SD A
SD B 10.00 SD B 10.00 SD B
Weight A 0.40 Weight A 0.40 Weight A
Weight B 0.60 Weight B 0.60 Weight B
Corel 1.00 Corel -1.00 Corel
Product 28.80 Product -28.80 Product

Total 70.56 Total 12.96 Total


Root 8.40 Root 3.60 Root

Question

Returns

Sec Retu Weight WAR Sec Retu Weight WAR Sec


A 11 50% 5.50 A 11 50% 5.50 B
B 20 50% 10.00 C 14 50% 7.00 C
15.50 12.50

First Part First Part First Part


Sec SD Weight Sec SD Weight Sec
A 289 25% 72.25 A 289 25% 72.25 B
B 841 25% 210.25 C 441 25% 110.25 C
282.50 182.50

2nd Part 2nd Part 2nd Part


SD A 17.00 SD A 17.00 SD B
SD B 29.00 SD C 21.00 SD C
Weight A 0.50 Weight A 0.50 Weight A
Weight B 0.50 Weight B 0.50 Weight B
Corel 0.00 Corel 0.62 Corel
Product 0.00 Product 110.67 Product

Total 282.50 Total 293.17 Total


Root 16.81 Root 17.12 Root

Question 10

Prob ER Ret A Prob ER Ret B


30% 28 8.40 30% (10) (3.00)
40% 24 9.60 40% 25 10.00
30% 4 1.20 30% 6 1.80
19.20 8.80
SD A SD B
(x-x) (X-x)2 P(X-x) (x-x) (X-x)2 P(X-x)
8.8 77 23.23 -18.8 353 106.03
4.8 23 9.22 16.2 262 104.98
-15.2 231 69.31 -2.8 8 2.35
101.76 213.36
SD (Root) 10.09 SD (Root) 14.61

Covariance

(x-x) (y-y) P(x-x)(y-y)


8.80 -18.80 (50)
4.80 16.20 31
-15.20 -2.80 13
-5.76

Question

Prob ER Ret A Prob ER Ret B


50% 0 0.06 50% 0 0.05
30% 0 0.02 30% 0 0.04
20% 0 0.04 20% 0 0.03
0.12 0.12

SD A SD B
(x-x) (X-x)2 P(X-x) (x-x) (X-x)2 P(X-x)
0.0 - 0.00 0.0 0 0.00
0.0 0 0.00 0.0 0 0.00
0.1 0 0.00 0.0 0 0.00
0.00 0.00
SD (Root) 0.03 SD (Root) 0.02

Covariance

(x-x) (y-y) P(x-x)(y-y)


0.00 -0.02 -
-0.04 0.00 (0)
0.06 0.04 0
0.00
Correlation 0.6100

First Part
Sec SD Weight
A 0 25% 0.00
B 0 25% 0.00
0.00

2nd Part
SD A 0.03
SD B 0.02
Weight A 0.50
Weight B 0.50
Corel 0.61
Product 0.00

Total 0.00
Root 2.59%
Zero Corelation

First Part
SD Weight
64 36% 23.04
144 16% 23.04
46

2nd Part
8
12
Weight A 1
Weight B 0
-
Product -

46
6.79

Zero Corelation

First Part
SD Weight
36 16% 5.76
100 36% 36.00
42

2nd Part
6.00
10.00
Weight A 0.40
Weight B 0.60
0.00
Product 0.00

41.76
6.46

Retu Weight WAR


20 50% 10.00
14 50% 7.00
17.00

First Part
SD Weight
841 25% 210.25
441 25% 110.25
320.50

2nd Part
29.00
21.00
Weight A 0.50
Weight B 0.50
0.40
Product 121.80

442.30
21.03