Finance

To relever the βe, we use the formula, βe = βu +(D/E)*(βu-βd). And the “Target D/E” was found by taking “Target D/V” divided by “1-Target D/V”. So we get the new βe, 1.3576. Then to get cost of equity, we use the CAPM formula, Re=Rf+β(EMRP), 11.7679%. Since we have get the cost of equity and cost of debt, we can determined the WACC, which is equal to Equity/Value*Cost of Equity+Debt/Value*Cost of Debt*(1-tax rate). In the end ,we arrived at 8.48%.

This solutions manual provides the answers to all the review questions and end-of-chapter problems in Financial Management: Principles and Practice, by Timothy Gallagher. The answers and the steps taken to obtain the answers are shown. Readers are reminded that in finance there is often more than one answer to a question or to a problem, depending on one‘s viewpoint and assumptions. One answer is

c. Smaller payments mean more time in debt. d. Your lower interest loans also get rolled into the deal so you end up with minimal savings.

NOTE: Please write your answers to each question in a different color font to make this easier for the Professor to grade.

1. Describe a real or made up but realistic situation that could cause you or someone you know to have to use money from a financial reserve. (3-6 sentences. 2.0 points)

a. Determine the value of the firm at the above debt levels. What level of debt should the firm

Decrease an asset and increase another asset. Credits decrease an asset and increase another asset.

answers will be marked as zero. Please include your answers to the Part A multiple-choice questions with your answer to

D. This will only affect the cost of capital if the firm uses CAPM to compute the cost of equity.

d) Calculate the new value per share after the capital structure change. (Hint: use your answers to parts b and c.)

This quiz consist of 20 multiple choice questions and covers the material in chapters 1 through 4. There are five questions from each chapter. Be sure you are in the correct Chapter when you take the quiz.

The mixture of debt-equity mix is important so as to maximize the stock price of the Costco. However, it will be significant to consider the Weighted Average Cost of Capital (WACC) as well so that it can evaluate the company targeted capital structure. Cost of capital (OC) may be used by the companies as for long term decision making, so industries that faced to take the important of Cost of capital seriously may not make the right choice by choosing the right project(Gitman’s, ).

Second City Options (SCO) is a small firm that specializes in option trading. Employing 35 people, SCO is located on LaSalle Street in the Chicago financial district. It is a member firm of the Chicago Board Options Exchange (CBOE), where it trades options on stocks and stock indices. It is also a member firm of the Chicago Mercantile Exchange Group (CME Group), where it trades options on futures and the underlying futures contracts.

3.3 Calculating the costs of equity by the earnings capitalization ratio, and its advantages & disadvantages i. Calculation (based on EXIHIBIT 1&4) According to the earnings capitalization model, we have cost of equity = E1 / P0 = 2.16 / 42.09 = 5.13%

In order to determine the beta and weight of debt for the Products and Systems segment, we averaged the Equity Beta and and the Mkt. Val. Debt/Capital for the Telecommunications Equipment and Computer and Network Equipment industries.