Corporate Finance - Corporate Finance Section 2
| Current ($) ) | Target ($) | |
| Book Value of Debt | 62 | 62 |
| Market Value of Debt | 59 | 63 |
| Book Value of Shareholder’s Equity | 78 | 88 |
| Market Value of Shareholder’s Equity | 230 | 240 |
Weights that should be applied to estimating the cost of debt and equity capital for Semiactive Conductors respectively are:
- Option : B
- Explanation : Use the market values of debt and equity to calculate their weights. wd = $63 / ($63 + $240) = 0.208 we = $240 / ($63 + $240) = 0.792.
- A
Using the new debt-to-equity ratio of Budweiser that would result from the additional $45 million debt and $65 million equity is appropriate.
- B
Using the current debt-to-equity ratio of 0.55 is appropriate.
- C
Using the current debt-to-equity ratio of 0.55 is not appropriate, but the debt-to-equity ratio of the new product line i.e. 0.69 is appropriate.
- Option : C
- Explanation : When making adjustments from the asset beta, derived from the comparables, to calculate the equity beta of the new product, the correct approach is to use the debt-to-equity ratio of the new product line.
23. An optimal capital budget occurs when the marginal cost of capital:
- Option : C
- Explanation : An optimal capital budget occurs when the marginal cost of capital intersects the investment opportunity schedule.
- Option : B
- Explanation : The point at which the marginal cost of capital intersects the investment opportunity schedule is the optimal capital.
| Source of capital | Capital structure proportion | Marginal after-tax cost |
| Long-term debt | 30% | 12% |
| Preferred stock | 5% | 15% |
| Common equity | 65% | 20% |
Net present values of three independent projects: Storage project: $348 Upgrade project: $0
Production line improvement project: -$231 If no significant size or timing differences exist among the projects and the projects all have the same risk as the company, which project has an internal rate of return that exceeds 17.35 percent?
Production line improvement project: -$231 If no significant size or timing differences exist among the projects and the projects all have the same risk as the company, which project has an internal rate of return that exceeds 17.35 percent?
- Option : B
- Explanation : The WACC of the company is calculated as follows: 0.3(12%) + 0.05(15%) + 0.65(20%) = 17.35%. To have a positive NPV, a project must have an IRR greater than the WACC used to calculate the NPV. Only the storage project has a NPV greater than $0 (at the company’s WACC of 17.35%), therefore only the storage project has an IRR that exceeds 17.35%.
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