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Chris Robinson

Chris R.

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w d 0% 20% 30% 40% 50% r d 0.0% 7.0% 8.0% 9.0% 10.0% The market risk premium is 5.5%, the risk free rate is 4.5%, beta of unleveraged firm is 1.25, Hamada’s equation b= b U [1 + (1 - T)(w d /w e )]. Tax rate T = 35%. Please use the above information to answer following questions: a. If the firm uses 40% debt, what is the cost of equity of the firm, based on CAPM model? b. What is WACC of the firm? c. If FCF 0 = 120 million, g=2%, what is the firm value?

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$2,013.03 = [Economic Breakeven Quantity * $45 - $1,800] * (1 - 0.35) + 0.35 * $1,250 =

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$10,000 / PVA of $1 (12%, 8) =

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Square root of 0.027618755 =

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30% * (35% - 14.75%) ^2 =

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45% * (15% - 14.75%) ^2 =

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25% * (-10% - 14.75%) ^2 =

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How diversification reduce the risk? What type of risk can diversification reduce?

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g. Tri Co. has the following cost of debt structure: wd 0% 20% 30% 40% 50% rd 0.0% 7.0% 8.0% 9.0% 10.0% The market risk premium is 5.5%, the risk free rate is 4.5%, beta of unleveraged firm is 1.25, Hamada’s equation b= bU [1 + (1 - T)(wd/we)]. Tax rate T = 35%. Please use the above information to answer following questions: a. If the firm uses 40% debt, what is the cost of equity of the firm, based on CAPM model?

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120 * (1 + 0.02) / (0.1096 – 0.02) =

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