CHAPTER 17
Does Debt Policy Matter?
Answers to Problem Sets
1.
Note the market value of Copperhead is far in excess of its book value:
Ms. Kraft owns .625% of the firm, which propos to increa common stock to $17 million and cut short-term debt. Ms. Kraft can offt this by (a) borrowing .00625 X 1,000,000 = $6,250, and (b) buying that much more Copperhead stock.
2. a.nominal % = 12.5%; = 20%
b. 12.5%
c. E/P = 20%; P/E = 5
d. $50
e. .5 X + .5 X 0 = 1.0; = 2.0.
3. Expected return on asts is rA珍爱生命演讲稿 = .08 X 30/80 + .16 X 50/80 = .13. The new return on equity will be rE = .13 + (20/60)(.13 - .08) = .147.
4. a.
b.
.8 = (.25 x 0) + (.75 x βE)
βE = 1.07
5. a. True
b. True (as long as the return earned by the company is greater than the interest payment, earnings per share increa, but the PyE falls to reflect the higher risk).
c. Fal (the cost of equity increas with the ratio D/E).
d. Fal (the formula rE = rA + (D/Etokki)(rA - rD) does not require rD to be
constant).
e. Fal (debt amplifies variations in equity income).
canopus funproper. Fal (value increas only if clientele is not satisfied).
6. a. rA = .15, rE = .175
b. βA= .6 (unchanged), βD= .3, βE= .9.
might是什么意思
7. See Figure 17.3.
8. Currently rA = r学习体会范文E = .14, or 14%. From proposition 2 the leverage caus rE to
increa to rE = rA + (rbreakdownA – rD)(D/E) = .14 + (.14 - .095) X (45/55) = .1768, or 17.68%
After-tax WACC = .095 X (1 - .40) X .45 + .1768 X .55 = .1229, or 12.29%.
9. a. The two firms have equal value; let V reprent the total value of the firm. Roncrantz could buy one percent of Company B’s equity and borrow an amount equal to:
0.01 (DA - D机警B) = 0.002V
This investment requires a net cash outlay of (0.007V) and provides a net cash return of:
(0.01 Profits) – (0.003 rf V)
where rf is the risk-free rate of interest on debt. Thus, the two investments are identical.
b. Guildenstern could buy two percent of Company A’s equity and lend an amount equal to:
0.02 (DA - DB) = 0.004V
This investment requires a net cash outlay of (0.018V) and provides a net cash return of:
(0.02 Profits) – (0.002 rf V)
Thus the two investments are identical.
c. The expected dollar return to Roncrantz’ original investment in A is:
(0.01 C) – (0.003 rf VA)
where C is the expected profit (cash flow) generated by the firm’s asts. Since the firms are the same except for capital structure, C must also be the expected cash flow for Firm B. The dollar return to Roncrantz’ alternative strategy is:
(0.01 C) – (0.003 rf VB)
Also, the cost of the original strategy is (0.007VA) while the cost of the alternative strategy is (0.007VB).
If VA is less than V提高表达能力B, then the original strategy of investing in Company A would provide a larger dollar return at the same time that it would cost less than the alternative. Thus, no rational investor would invest in Company B if the value of Company A were less than that of Company B.
10. When a firm issues debt, it shifts its cash flow into two streams. MM’s Proposition I states that this does not affect firm value if the investor can reconstitute a firm’s cash flow stream by creating personal leverage or by undoing the effect of the firm’s leverage by investing in both debt and equity.
It is similar with Carruther’s cows. If the cream and skim milk go into the same pail, the cows have no special value. (If an investor holds both the debt and equity, the firm does not add value by splitting the cash flows into the two streams.) In the same vein, the cows have no special value if a dairy can costlessly split up whole milk into cream and ski
m milk. (Firm borrowing does not add value if investors can borrow on their own account.) Carruther’s cows will have extra value if consumers want cream and skim milk and if the dairy cannot split up whole milk, or if it is costly to do so.
11. a. The market price of the stock is not affected by the announcement.
b. Since the market price of the shares is $10, the company can buy back:
$160 million/$10 = 16 million shares
c. After the change in capital structure, the market value of the firm is unchanged:
Equity + Debt = (9 million $10) + $160 million = $250 million
d. After the change in structure, the debt ratio is:
Debt/(Debt + Equity) = $160 million/$250 million = 0.64
e. No one gains or los. (See the answer to the next question.)
12. a. The market value of the firm’s equity increas by $30 million, the amount of the decrea in the market value of the firm’s existing debt. Therefore, the price of the stock increas to:
($150 million + $30 million)/15 million shares = $12
b. Since the market price of the shares is $12, the company can buy back:
