# Weeks 1 - 7 Homework Answer Key

3549 Words15 Pages
FI516 – WEEK 1 – HOMEWORK ANSWER KEY Problem 14-10 14-10 a. 1. 2011 Dividends = (1.10)(2010 Dividends) = (1.10)(\$3,600,000) = \$3,960,000 2. 2010 Payout = \$3,600,000/\$10,800,000 = 0.33 = 33% 2011 Dividends = (0.33)(2009 Net income) = (0.33)(\$14,400,000) = \$4,800,000 (Note: If the payout ratio is rounded off to 33%, 2011 dividends are then calculated as \$4,752,000.) 3. Equity financing = \$8,400,000(0.60) = \$5,040,000 2011 Dividends = Net income - Equity financing = \$14,400,000 - \$5,040,000 = \$9,360,000 All of the equity financing is done with retained earnings as long as they are available. 4. The regular dividends would be 10% above the 2010 dividends: Regular dividends = (1.10)(\$3,600,000) = \$3,960,000. The residual policy calls…show more content…
The additional funds, especially under 3, may enable the firm to become more current on its trade credit. Also, the bonds will no doubt be subordinated debentures. Both Alternatives 2 and 3 are favorable alternatives. If the principal owner is willing to assume the risk of higher leverage, then 3 is slightly more attractive than 2. The actual attractiveness of Alternative 3 depends, of course, on the assumption that funds can be invested to yield 20% before interest and taxes. It is this fact that makes the additional leverage favorable and raises the earnings per share. Problem 15-9: Capital Structure Analysis Present situation (50% debt): WACC = wd rd(1-T) + wcers = (0.5)(10%)(1-0.15) + (0.5)(14%) = 11.25%. V = FCF/WACC = (EBIT)(1 − T)/WACC = (\$13.24)(1 0.15)/ 0.1125 = \$100million 70 percent debt: WACC = wd rd(1-T) + wcers = (0.7)(12%)(1-0.15) + (0.3)(16%) = 11.94%. V = FCF/WACC = (EBIT)(1 − T)/WACC = (\$13.24)(1 0.15)/ 0.1194 = \$94.26million 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 = (\$13.24)(1 0.15)/ 0.1114 = \$101.2million Problem 15-10: Optimal Capital Structure with Hamada a. BEA’s unlevered beta is 0.870 bU =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% = wd rd(1-T) + wcers =