1. A company is 40% financed by risk-free debt. The interest rate is 10%, the expected market risk premium is 8%, and the beta of the company's common stock is .5.
| Risk Free Debt |
Interest Rate |
Market Risk Premium |
Beta |
Taxes |
| 40% |
10% |
8% |
0.5 |
35% |
a. What is the company cost of capital?
b. What is the after-tax WACC, assuming that the company pays tax at a 35% rate?
2. Suppose that the expected variable costs of Otobai's project are ¥33 billion a year and that fixed costs are zero. a. How does this change the degree of operating leverage (DOL)? b. Now recompute the operating leverage assuming that the entire ¥33 billion of costs are fixed.
3. "Assume that MM's theory holds with taxes. There is no growth, and the $40 of debt is expected to be permanent. Assume a 40% corporate tax rate.
a. How much of the firm's value is accounted for by the debt-generated tax shield?
b. How much better off will UF's a shareholder be if the firm borrows $20 more and uses it to repurchase stock?"
4. "A project costs $1 million and has a base-case NPV of exactly zero (NPV = 0). What is the project's APV in the following cases?
a. If the firm invests, it has to raise $500,000 by a stock issue. Issue costs are 15% of net proceeds.
b. If the firm invests, its debt capacity increases by $500,000. The present value of interest tax shields on this debt is $76,000."
5. If a firm pays its bills with a 30-day delay, what fraction of its purchases will be paid in the current quarter? In the following quarter? What if the delay is 60 days?