... “OPTIMAL CAPITAL STRUCTURE AND “TARGET
CAPITAL STRUCTURE. ”
ANSWER: [SHOW S13-16 HERE.] THE OPTIMAL CAPITAL STRUCTURE IS THE CAPITAL
STRUCTURE AT WHICH THE TAX-RELATED BENEFITS OF LEVERAGE ... optimal capital structure is that capital structure which
minimizes the firm’s WACC. Elliott’s WACC is minimized at a capital
structure consisting of 40% debt and 60% eq...
... Finch Inc.
Risk and Return
5-23 ASSUME THAT YOU RECENTLY GRADUATED WITH A MAJOR IN FINANCE, AND YOU
JUST LANDED A JOB AS A FINANCIAL PLANNER WITH MERRILL FINCH INC., A
LARGE FINANCIAL SERVICES ... and (k
M
- k
RF
) = 8%.
Answers and Solutions: 5 - 7
5-22 The detailed solution for the spreadsheet problem is available both on
the instructor’s resource CD-ROM and on the instr...
... Change N = 1, PV = ? PV = $1,047.62.
Answers and Solutions: 7 - 2
SOLUTIONS TO END-OF-CHAPTER PROBLEMS
Answers and Solutions: 7 - 1
Chapter 7
Bonds and Their Valuation
... going rate, and it is about
what the firm would have to pay on new bonds.
Answers and Solutions: 7 - 4
7-1 With your financial calculator, enter the following:
N = 10; I = YTM = 9%; PMT = 0.08 × ... d. Using a...
... of the EMH on
financial decisions; and discuss the results of empirical studies on
market efficiency and the implication of behavioral finance on those
results.
• Read and understand the stock ... 12.00%
2008
D
6
/P
5
= $3.70/$52.80 = 7.00%
Capital gains yield = 5.00
Expected total return = 12.00%
Answers and Solutions: 8 - 13
6.25% = g.
Answers and Solutions: 8 - 10
MANY ST...
... Projects 1 and 2 will be accepted since their rates of return exceed
the WACC.
Answers and Solutions: 9 - 10
$3.54 million (60%) of equity capital and $2.36 million (40%) of debt
capital. In ... value-maximizing firm will determine its optimal capital
structure, use it as a target, and then raise new capital in a manner
designed to keep the actual capital structure on ta...
...
increase its investment in receivables and inventories, over and above
the increase in payables and accruals, thus increasing its net operating
working capital (NOWC). Since this increase must ... standard
deviation or the coefficient of variation. Hence, Project B is
evaluated at the 12 percent cost of capital, while Project A requires
only a 10 percent cost of capital.
Usin...
... over Project C. The projects now
selected are A, B, D, and E with an optimal capital budget of $4 million.
Answers and Solutions: 12 - 4
SOLUTIONS TO END-OF-CHAPTER PROBLEMS
10%
10%
k = 10%
... project is independent and of average risk, all projects whose
IRR > WACC will be accepted. Consequently, Projects A, B, C, D, and E
will be accepted and the optimal capital budget...
... capital
structure, and still follow the residual dividend policy.
h. The firm can do one of four things:
(1) Cut dividends.
(2) Change capital structure, that is, use more debt.
(3) Cut its capital ... SSC HAS AN $800,000 CAPITAL BUDGET PLANNED FOR THE COMING
YEAR. YOU HAVE DETERMINED THAT ITS PRESENT CAPITAL STRUCTURE (60
PERCENT EQUITY AND 40 PERCENT DEBT) IS OPTIMAL, AND...
... 101.28
Total liab.
and equity $122.50 $161.28 $147.00
AFN = -$14.28
Answers and Solutions: 17 - 11
New World Chemicals Inc.
Financial Forecasting
17-19 SUE WILSON, THE NEW FINANCIAL MANAGER OF ...
equity and
sliabilitie
Total
- Common stock – Retained earnings
Answers and Solutions: 17 - 6
In Chapter 3, we looked at where the firm has been and where it is now its
current st...