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Advanced Managerial Finance

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Submitted By amy123
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Question:

1. Locate the annual balance sheets for General Motors (GM), Merk (MRK), and Kellogg (K). For each company calculate the long term debt-equity ratio for the prior two years. Why would these companies use such different capitals structures?

2. Look up a company and download the annual income statements. For the most recent year, calculate the average tax rate and EBIT, and find the total interest expense. From the annual balance sheets calculate the total long-term debts (including the portion due within one year). Using the interest expense and total long term debts, calculate the average cost of debt. Next, find the estimated beta for the company on the S&P Stock Report. Use this reported beta, a current T-bill rate, and the historical average market risk premium found in a previous chapter to calculate the levered cost of equity. Now calculate the unleveraged cost of equity, then the unlevered EBIT. What is the unlevered value of the company? What is the value of the interest tax shield and the value of the levered company.

Answer:

|Company name/Year |Debt-equity ratio 2010 |Debt-equity ratio 2011 |
|General Motors (GM) |0.28 |0.31 |
|Merck (MRK) |0.28 |0.28 |
|Kellogg (K) |2.27 |2.86 |

Working:

1. Long term debt-equity ratio formula = Long term debts Shareholders’ Equity

i) General Motors (GM)

Long term debt-equity

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