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Financial Risk

In: Business and Management

Submitted By kobe24bryant
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Group 1, HW6

9-3
a) After Tax Cost of debt = (1-tax rate)*borrowing rate=5.6%
Then we can use the CAPM model to calculate the Levered cost of equity, which is 15%

b) First we need to calculate the FCF (EBIT-Tax payments+Depreciation-investments), which is 15400, then use the firm FCF-interes=Equity FCF.
Then we need to find the Debt Valuation from the balance sheet which is 25000, then use the Equity FCF to calculate the Equity Valuation, which is Equity FCF/ Levered Cost of equity, which is 93333
Now we can add this two together(Debt Valuation+Equity Valuation) to get the Enterprise Value which is 118333

c) Based on the given data, we can use the WACC formula (Wd*(1-T)*Rd+We*Re) to calculate this ratio. Which is 13.01%

d) We have already calculated the FCF(15400)

e) Enterprise Value= FCF/WACC=118333, which is consistent with we calculated before.

f) Value per share= Enterprise Value/ Number of Shares=46.67

9-5
a) Unleveled cost of equity= BL/ (1+(1-T)*D/E)= 13.89%

b) We have already calculated the FCF(15400)

c) Interest Tax saving= Interest Expense*Tax Rate, which is 600 each year.

d) The same as we did in 9-3
First we need to calculate the Equity Value, which is FCF/ Unleveled Cost of Equity=110833
Then we need to calculate the value of tax savings, which is 600/Borrowing Rate(8%)=7500
The Enterprise Value= Equity Valve+ Value of Interest Tax savings=118333, which is consistent with the result we calculated before.

e) Value per Share= Enterprise Value/ Number of

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