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16-1
QBE = F/(P
16-3
16-2
16-4
S = (1
16-5
16-6
n = n0
16-7
(2)
wd)(Vop) = (1
(D/P) = 60
($150/$7.5) = 60 20 = 40 million.
= P(Q) - FC - V(Q)
= ($100,000)(50) - $2,000,000 - V(50)
= $2,500,000
= $50,000.
(3)
(4)
Since the return exceeds the 15 percent cost of equity, this analysis suggests that the
firm should go ahead with the change.
b. The change would increase the breakeven point:
Old:
QBE =
New: QBE =
P V
$2,000,000
= 40 units.
$100,000 $50,000
$2,500,000
= 45.45 units.
$95,000 $40,000
c. It is impossible to state unequivocally whether the new situation would have more or
less business risk than the old one. We would need information on both the sales
probability distribution and the uncertainty about variable input cost in order to make
this determination. However, since a higher breakeven point, other things held
constant, is more risky. Also the percentage of fixed costs increases:
Old:
FC
$2,000 ,000
=
= 44.44%.
FC V(Q)
$2,000 ,000 $2,500 ,000
New:
FC2
$2,500,000
=
= 47.17%.
FC2 V2 (Q 2 )
$2,500,000 $2,800,000
The change in breakeven points--and also the higher percentage of fixed costs-suggests that the new situation is more risky.
16-8
0.2(25.0 15.0) 2
0.1( 20) 2
0.2(5.0 15.0) 2
0.1(35.0 15.0) 2
0.2( 10 ) 2
40 20 0 20 40
0.4(0) 2
120
0.4(15.0 15.0) 2
0.2(10) 2
11.0%.
0.1( 20) 2
b. According to the standard deviations of ROE, Firm A is the least risky, while C is the
most risky. However, this analysis does not take into account portfolio effects-c.
16-9
FCF
WACC
( EBIT )(1 T)
WACC
0)]/200,000
60,000.
60,000 = 140,000.
Initial position:
EPS = NI/n0
= [(EBIT Int.)(1-T)] / n0
= [($500,000 0)(1-0.40)] / 200,000 = $1.50.
d. 30% debt:
TIE =
EBIT
EBIT
=
.
I
$70,312 .5
Probability
0.10
0.20
0.40
0.20
0.10
TIE
( 1.42)
2.84
7.11
11.38
15.64
FCF
WACC
70 percent debt:
FCF
WACC
30 percent debt:
WACC = wd rd(1-T) + wcers
= (0.3)(8%)(1-0.15) + (0.7)(13%) = 11.14%.
V=
FCF
WACC
( EBIT )(1 T )
WACC
16-11 a.
U=b/(1+
(1-T)(D/S))=1.0/(1+(1-0.40)(20/80)) = 0.870.
b. b = bU (1 + (1-T)(D/S)).
At 40 percent debt: bL = 0.87 (1 + 0.6(40%/60%)) = 1.218.
rS = 6 + 1.218(4) = 10.872%
c. WACC = wd rd(1-T) + wcers
= (0.4)(9%)(1-0.4) + (0.6)(10.872%) = 8.683%.
V=
FCF
WACC
rRF = 5.0%
rM rRF = 6.0%
From data given in the problem and table we can develop the following table:
0.00
0.20
0.40
0.60
0.80
D/A
E/A
1.00
0.80
0.60
0.40
0.20
0.0000
0.2500
0.6667
1.5000
4.0000
D/E
7.00%
8.00
10.00
12.00
15.00
rd
4.20%
4.80
6.00
7.20
9.00
rd(1
T)
1.20
1.38
1.68
2.28
4.08
Levered
betaa
12.20%
13.28
15.08
18.68
29.48
Notes:
These beta estimates were calculated using the Hamada equation,
b = bU[1 + (1 T)(D/E)].
b
These rs estimates were calculated using the CAPM, rs = rRF + (rM rRF)b.
c
These WACC estimates were calculated with the following equation:
WACC = wd(rd)(1 T) + (wce)(rs).
rsb
12.20%
11.58
11.45
11.79
13.10