Question

12.On January 1, 2010 the total market value of DOS Company was $50 million. During 2010, the company plans to raise and Invest $10 million in new assets. The firm's present market value, optimal capital structure is $10 million debt and $40 million equity. والنهار - مهدی ملل همه ی WACC = (Wd)(Rd)(1-T) + (WC)(Rs) Wd = 10/50 We = 40/50 W 40m/50ml 7= 407 T=40% The current bonds have annual coupons of 11%, 15 years to maturity, a $1000 face value and sel for $1020 each -1020 A1 Costa (A) 110 B1. _.repeat 14 times 1110 In last cell 15-cell IRRIAI - KA The company has a beta of 13, the long-term T-bond rate is 5%, the return on the NYSE composite index has averaged 12%/ n ) The common stock is currently selling at $45 per share but can only be sold to net the company only $43 a share after investment banking costs. The next dividend D1 is $2.84 and the company has an expected growth rate of 7.5% The marginal tax rate is 40% a. Calculate rd. 4 points) see above b. Find the rs by the CAPM approach and by the DCF approach and take the average (4 points) Rrf 5% Rm123 RP. (Rm-Rrf) = (12-5) = 7% Beta - 1.3 had Rs = Rrf + beta(7%) - 5. 1.317) === CAPM RS - Rs - (01/Po) + 6 - (2.84/45)..075 - DCF Rs (remember to mult by 100.)- de s Rs. (CAPM. DCF/2 Rs for the WACC e l c. Calculate the WACC (2 points) d. If we had the following investment opportunities which ones should it accept given your answer in partc? (1 point) weighted Cost .. Return Cost 500,000 - R Cast t there wACC B 15 200.000 - buy it C13 400,000 500,000 & thee WACC @buy it ha affront of 07 and around rate of return of 15 percent. The

Answer 1

a) Return on Debt Rd = 11% * (1- Tax (40%)) = 6.6%

b) Return on Equity

CAPM = 5 + 1.3 *7 = 5 +9.1= 14.1

DCF = (2.84/45) + 0.075 = 0.1381 *100 = 13.81

(14.1+13.81)/2 = 13.95%

c) WACC

0.2*6.6+0.8*13.95 = 12.48%

d) Since WACC is 12.48% so option A, B and C can be accepted as it gives Return more than WACC