Sheet1

Spring 1998
Problem 1 Bond Rating = BBB Interest Rate = 9.00% After-tax Cost of Debt = Unlevered Beta = 1.06/(1+(1-0.4)(.1111)) = Beta at 25% D/E Ratio = 0.99(1+0.6(.25)) = Cost of Equity = 7% + 1.14 (5.5%) = Cost of Capital = 5.40% (.2) + 13.27% (.8) =

5.40% 0.993756211 1.142819643 13.27% 11.70%

Problem 2 Change in Firm Value = (250 + 50) (.11-.10)(1.05)/(.10-.05) = Change in stock price = 63/10 = $ 6.30 ($10.50 if you assume buyback at current price) Problem 3 (100/250) (2) + (150/250) (X) = 5 Solve for X,

63

X = 7 years

Spring 1999
Problem 1 Value of Bank Loan = 4 (PVA,7%,5) + 50/(1.07)^5 = Value of Bonds Outstanding = PV of Operating Leases = 10 (PVA,7%,7) = Market Value of Outstanding Debt= Market Value of Equity = 15* 10 = Debt Ratio = 155.94/(150+155.94) = Cost of Equity = 6% + 1.2 (5.5%) = Cost of Capital = 12.60%(.49) + 7% (1-.4)(.51) = Adjusted EBIT = 40 + 53.89*0.7 = Adjusted BV of Capital = 50 + (50 + 50 + 53.89) = Adjusted Return on Capital = 43.77 (1-.4)/203.89 = $43.77 203.89 12.88% $52.05 $50.00 $53.89 $155.94 $150.00 50.97% 12.60% 8.32%

Problem 2 Change in Firm Value = 3 * 10 = $30.00 Firm Value (Chg in WACC) (1.05)/(WACC(after)-.05) = 250 (Chg in WACC)(1.05)/(.10 -.05)= 30 Chg in WACC = 0.57% WACC before = 10.57% Ke (.8) + 8%(1-.4) (.2) = 10.57% Cost of Equity before transaction = (.1057-.0096)/.8 = 12.01%

Problem 3 Value of firm before expansion = 300 + 70*10 = Duration of assets after expansion = 7.5 (1000/1250) + 1 (250/1250) = Weighted Duration of Assets has to be equal to 6.2years (200/550)(1) + (100/550)(4) + (250/550) (X) = Solve for X X = 11.24 years

1000

6.2

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Sheet1

Spring 1999 (A)

Problem 1

PV of operating leases = Straight Debt portion of convertible debt = Total Debt = Equity Value of stock = Value of conversion option = 2500-1798= Value of Equity = Cost of Equity = 5.5% + 1.25(6.3%) = Cost of Debt (after-tax) = 7.5%(1-.4)= Cost of Capital = 13.375% (3702/6908) + 4.50% (3206/6908) =
Problem 2

$ $ $

1,408 1,798 3,206

$ $ $

3,000 702 3,702 13.375% 4.50% 9.26%

Change in Firm Value = 5000 (.10 - WACC after)/WACC after = 500 Solve for WACC after, WACC after = 500/5500 = Cost of Equity after = 5.5% + 1 (6.3%) = 11.8(X) + 5% (1-X) = 9.09% Solve for X, X = (9.09-5)/6.8 = Debt to Capital ratio =
Problem 3

500

9.09% 0.118

60% 40%

Cody's should have long term debt: Negative coefficient suggests duration of 7.5 years BAM should have floating rate debt: Oper income tends to move with inflation

Spring 2000
Problem 1 a. False. It has to be weighed off against the increase in both costs b. True. It will reduce the marginal tax advantage of debt c. True. The net operating loss carry forward will reduce the tax benefit of the debt. (No matter how the the argument is structured, the firm without net operating losses will be able to borrow more money and get a larger tax savings. The NOL will reduce the income available from which interest expenses can be deducted. d. False. If you are more uncertain about future investment needs, you will value flexibility more and borrow less. Problem 2 Current cost of capital = Cost of equity (because firm has no debt) = Change in firm value = .1375 = (Cost of capital before - Cost of capital after)/Cost of capital after 0.1375 = (0.092 - Cost of capital after)/Cost of Capital after Solving, Cost of capital after = 0.092/(1+.1375) = 8.09% Cost of equity after = 10.48% Cost of debt after = 4.5% 10.48% (1-X) + 4.5% (X) = 8.09% Solving for X, X = 40%

9.20%

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Sheet1

Problem 3 Duration of assets = Existing Debt = New Debt = (1/(1+3)) (4) + (3/(1+3)) X = 7 Solving Duration of new debt = Proportion on new debt that has to be 2 year debt =

7 1 (duration of this debt = 4 years) 3 ! Since the asset mix does not change, the duration remains 7. 8 25% (.25(2) + .75(10) = 8)

Spring 2001
Problem 1 a. Current Cost of Equity = Current cost of debt = Current cost of capital = b. New debt to capital ratio = New debt to equity ratio = Unlevered Beta = New Beta = New cost of equity = New after-tax cost of debt = New Cost of capital= c. Number of shares bought back = c. Change in annual financing cost = Change in firm value = Change per share = 10.72% ! 5% + 1.04*5.5% 3.90% 8.47% ! 10.72% (.67) + 3.9% (.33) 50% 100.00% 0.8 1.28 12.0400% 4.05% 8.05% 21.7391304 $6.37 $79.13 $0.59

! If you decide to use the effective tax has to be that you do not have enoug However, this will mean that the effec If you did this, I gave you full credit.

! I gave full credit if you read the incre of the existing interest rate (I did take if you read it as 25% ! You lost a point if you did not unleve

! Since the price at which you were bu cannot divide by the total number of s

! Transfer of wealth to stockholders s

Problem 2 Market value of the firm = 2000 ! 1000/.5 Dollar debt at optimal of 25% = 500 ! Don't increase the size of the firm. Otherwise, asset Duration of debt at optimal Let X be the proportion of the debt that is 5-year debt at optimal X (4) + (1-X) (8) = 7 X = .25 The firm has to have $ 125 million in 5-year debt and $ 375 million in 10-year debt It needs to pay off $ 275 million of 5-year debt and $ 225 million of 10 year debt.

Spring 2002
Problem 1 Part a: Current cost of capital Beta = Cost of equity = Cost of capital = Part b: New cost of capital Unlevered beta = New levered beta = New cost of equity = New cost of capital = 1.15 9.85% 9.23% ! Debt ratio = 10% Math error: -0.5 forgot to after-tax cost of debt: -0.5

1.078125 1.35535714 ! Don't forget to unlever and relever 10.67% 8.73%

! Forgot to adjust cost of equity : ! Math errors: -0.5

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Sheet1

Part c Borrow money over next 5 years and pay dividends Its stockholders like dividends, because it has paid large dividends in the past Its projects earn less than its cost of capital Problem 2 Cost of capital before = Cost of capital after Change in firm value = Increase in dollar debt to get to 25% = Number of shares bought back = Number of shares left = Increase in value per share = Problem 3 a. Long term, Dollar, Fixed Rate, Straight

9.00% 8.00% 824 ! Forgot to consider the effect of growth : -1 point 1000 12.5 37.5 ! Did not adjust the number of shares for buybac 21.9733333 ( Remember that you cannot divide by 50 if you a

b. Long term, Mixed Currency, Floating Rate, Straight

c. Short term, Dollar, Fixed Rate, Convertible

! ! ! ! ! ! ! ! ! ! ! !

Heavy infrastructure: Long term U.S. operations: Dollar No pricing power: Fixed Low growth: Straight Brand Name: Long term Worldwide operations: Mixed Currency Pricing power: You can pass inflation through High margins and cashflows : Straight (Some o Speedy Obsolescence: Short term U.S. operations: Dollar High Uncertainty: Floating (but Competitive Ind High growth: Convertible

Spring 2003
Problem 1 Current cost of capital = Current debt ratio = Current after-tax cost of debt = Current cost of equity = Current beta = Unlevered beta = New levered beta = Cost of equity = New cost of capital = Change in firm value Number of shares = Price at which bought back = Number bought back = Number remaining = 9% 0.25 0.036 0.108 1.45 1.21 2.30 14.18% 8.19% $393.82 ! (.09 - .0819) (4000)/.0819 100 $33.00 30.3030303 ! 1000/33 69.6969697

! Debt = 3000; Equity = 2000; Stock buyback reduces the value

! If you had the NPV of the new in

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Sheet1

Change in value per share = Price per share after transaction = Problem 2 Duration of existing debt = Duration of new debt = Currency break down Dollar debt = Euro debt =

$4.35 ! (393.82 - (33-30) (30.30))/69.70 $34.35

2.00 6.50

50% 50% ! $1 billion of Euro debt needed to get to $ 1 billion (1/3 of total debt)

Spring 2004
Problem 1 New beta = Cost of equity = Interest coverage ratio = Rating = Cost of debt = After-tax cost of debt = Cost of capital = Problem 2 a. Value of firm = Cost of capital = Cashflow last year = Expected growth rate= b. Increase in value from recapitalization Annual cost at current cost of capital = Annual cost at new cost of capital = Annual savings = PV at expected growth rate = 1.12 0.093984 3.75 BB+ 0.06 0.036 7.08%

1050 ! 80*10+250 10% 50 1050 = 50 (1+g)/ (Cost of capital -g) 0.05 1050 = 50 (1+g)/(.10-g)

105 94.5 10.5 262.5

c. If investors are rational, savings will accrue to all stockholders Increase in value per share = 3.28125 New stock price = 13.28125 Number of shares bought back = 18.8235294 Number of shares left = 61.1764706 Problem 3 6 (150/500) + 8 (100/500) + X (250/500) = 10 Solving for X, Duration of new bond = 13.2 Since the firm has little pricing power, you would go with fixed rate debt Since half of its revenues come from the EU region, half of its total debt of $ 500 million should be in Euros Hence the firm should use 100% Fixed rate, Euro debt

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Sheet1

Spring 2005
Problem 1 Value of unlevered firm = With $250 million in debt, used to buy back stock Value of levered firm = Tax benefit from additional debt = 1000 !100 *10 !This firm has no debt. This is the

1025 ! 100 *10.25 100 ! Tax rate * Dollar Debt

Value of levered firm = Value of unlevered firm + Tax benefit - (Probability of bankruptcy * Cost of bankruptcy) 1025 = 1000 + 100 - (X* .30*1000) Probability of bankruptcy = 25% Problem 2 Current market value of equity = Market value of debt = Value of firm = Cost of capital = 10.44% = Cost of equity (.80) + 4.2% (.20) Cost of equity = 0.12 Current beta = 1.75 After debt is repaid New beta = New cost of equity = New firm value = Problem 3 a. Current asset duration = 0.75(10) + 0.25 (5) =

4000 1000 5000

1.52173913 11.09% ! Equal to cost of capital $4,708.24 ! Change in firm value = (.1044-.1109) 5000/.1109

8.75

b. Expected asset duration if tourism business doubles = (0.75/1.25)(10) + (0.5/1.25) (5) = To solve for duration of new debt (.5/.75)*6+(.25/.75)*X = 8 ! New debt issue = 0.25 Duration of new debt = 12

Fall 2006
Problem 1 a. Cost of equity = 4.5% + 1.00*4% = Cost of capital = 8.5% (.9) + 5% (.1) = b. With change in tax status and leverage Unlevered beta = New levered beta = Cost of equity = Cost of capital = c. Change in firm value, assuming 3% growth rate Savings in costs each year = Increase in firm value = Firm value after transaction = 8.50% 8.15%

0.9 ! 1/ (1+(1-0)(1/9)) 1.44 ! 0.9 (1+(1-.4)(50/50)) 10.26% 6.93% ! 10.26% (.5)+6%(1-.4)(.5)

$12.20 ! 1000 (.0815-.0693) $310.43 ! 12.20/(.0693-.03) $1,310.43

Page 6

Sheet1 Price paid on transaction For equity = 11.5*90= For debt = Total price paid = Value gained in transaction = Prtoblem 2 Duration of assets after divestiture = Duration of debt after transactiion Let the proportion of 10-year bonds after the repayment be X X(10) + (1-X) (2) = 8.25 Solving for X, X= 0.78125 Dollar debt after repayment = 8 -4 = 4 10-year bonds after the repayment = 2-year bonds after the repayment = Repaid amounts 10-year bonds = 2-year bonds =

$1,035.00 $100.00 $1,135.00 $175.43

8.25

! Repaid $ 4 billion of debt 3.125 0.875 2.875 1.125

Problem 1 a. Cost of capital at existing debt ratio = ! 13%(.4)+9%(1-.4)(.6) 8.44% b. Beta at current cost of equity = 2 ! (13-5)/4 Unlevered beta = 1.0526 New Debt to Equity Ratio = 42.86% ! (600-300)/(400+300) Levered Beta = 1.3233083 New cost of equity 10.29% New cost of capital 8.29% Problem 2 a. Change in firm value = $11.11 ! (80+20)(.10-.09)/.09 b. Number of shares bought back = 6 Share of firm value to buy back shares ! 6* $1/share $6.00 Share of firm value to remaining shares $5.11 Number of shares remaining 14 ! 20-6 Value increase per remaining share $0.37 Problem 3 Duration of existing assets = Duration of existing debt =

Spring 2007

8 ! 2(5/20)+10(15/20) 8

Duration after transaction 6.8 ! 2(5/12.5)+10(7.5/12.5) To estimate the duration of the new debt 8(5/10) + X(5/10) = 6.8 Duration of new debt = 5.6

Spring 2008
Page 7

Sheet1 Problem 1 Old debt to equity = Current beta = New debt to equity = New beta = New cost of equity = New after-tax cost of debt = Debt Ratio = Cost of capital = Problem 2 Current cost of capital = New cost of capital = Market value of firm = Annual cost savings = PV of savings (with g=4%) = New firm value = b. Value of firm = - Debt = Value of equity = Number of shares = Value per share =

0% 1.00 ! Cost of equity is 9%; Rf =5% and Risk premium =4% 42.86% ! 600/1400; Debt used to buy back stock 1.2571 10.03% 3.60% 30.00% ! 600/ (600 +1400) 8.100%

12% 10.00% 1000 ! 200 + 800 20 333.333333 ! 20/ (.1-.04): Okay if you used (1+g) 1333.33333 1333.33333 500 ! Paid off $ 300 million out of $ 800 million 833.333333 30 $27.78

Here is anyother way to get to the same solution Increase in firm value = $333.33 Discount on stock offered = $100.00 ! The discount on the private placement Remaining value savings = $233.33 / Number of shares= $30.00 Increase in value per share= $7.78 Added tos hare price = $27.78 Problem 3 Value of business Duration of assets Weighted duration = Value Duration Solving for duration of new debt 5 * (25/75) + X (50/75) = 6 Duration of new debt = Existing assets New Business 100 50 7.5 3 6 ! 7.5(100/150)+3 (50/150) Existing debt New debt 25 50 5X

6.50

Spring 2009
Problem 1 a. Existing cost of capital Debt Equity Capital Estimated value Weoight Cost Risk measure 600 0.6 6.00% BB 400 0.4 17.68% 2.28 1000 10.67%

Page 8

Sheet1 b. New cost of capital New debt ratio = New D/E ratio = Unlevered beta = New levered beta =

30.00% 0.4285714 1.2 1.5085714 Weight Cost Risk Measure 30.00% 3.90% A 70.00% 0.1305143 1.5085714 10.31%

Debt Equity

Problem 2 Current cost of equity = Current cost of capital = 10.00% If investors are rationa, all shares get an equal portion of increase in firm value Increase in firm value = 100 ! Since investors are rational, all shares gain $1.00. Solving for cost of capital after, (Cost of capital before - Cost of capital after)*Existing firm value/ Cost of capital after =100 (.10-Cost of Capital after)*1000/ cost of capital after = 100 Cost of capital after = 9.09% Beta after = Cost of equity after= 12.4% (.6) + X(1-.4) (.4) = .0909 Pre-tax cost of debt = 1.4 ! Lever the beta, using new debt/equity ratio 12.400% 6.88%

I kept the firm value constant at 1000 in the example above. If you use 1100 as firm value, the answers will b D/E ratio after = 0.5714286 Beta after = 1.3428571 Cost of equity after = 12.06% 12.06% (700/1100) + X (1-.4) (400/1100)= .0909 Pre-tax cost of debt = 6.49% Problem 3 Weighted duration of assets after cash is used = 8.4 ! Duration of the debt has to be equal to this after the debt is paid off: X (10) + (1-X) (0) = 8.4 84% of the debt has to be 10-year zero coupon debt. Total debt outstanding after debt retirement = 1300 ! !0-year zero coupon debt = 1092 ! 10-year coupon debt to be paid off = 108 ! Short trm debt to be paid off = 92 !

Weighted average of just operating asset (since cash is being used for retiring deb

Debt outstnading before - Debt repaid 84% of outstanding debt Long term debt repaid Short term debt repaid

Spring 2010
Problem 1 a. Current cost of capital Cost of equity= After-tax Cost of debt = Debt/Capital ratio = Cost of capital = 10% 3.60% 20.00% 8.72%

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b. New after-tax cost of debt Operating Income New dollar debt = New interest rate= New interest expenses = Adjusted tax rate = New after-tax cost of debt = c. New cost of capital Current beta = Unlevered beta = New Equity value = New D/E ratio = New levered beta = New cost of equity = New after-tax cost of debt = New debt to capital ratio = New cost of capital = Problem 2 Current firm value = Current cost of capital =

120 1500 10% 150 32.00% 6.80%

1.2 1.0435 ! Used old tax rate to unlever 1000 1.5 2.11 ! Used new tax rate to relever but no penalty if you use 40% 14.54% 6.80% 0.6 9.90%

1000 9%

Since the shares were bought back at $10.50 and investors are rational Increase in firm value = 50 ! Everyone has to receive $0.50 more Increase in firm value = (Old cost of capital - New cost of capital) Firm value/ (New cost of capital - growth rate) 50 = (.09-X) (1000)/(X-.03) Solving for X, New cost of capital = 8.71% Problem 3 Duration of debt currently = Duration of all assets = Value of all assets = Value of Manufacturing = Value of Financial Services = Since the duration of assets = duration of debt 9 (4/5) + X (1/5) = 8 X=

8 8 5 4 1

Spring 2011
Problem 1
Current D/(D+E) = 40.00% Current after-tax cost of debt = 4.80% Cost of capital = Cost of equity (.60) + 4.80% (.40) = .0972 Current cost of equity = 13% Current beta (levered) = 2 Unlevered beta = 1.42857143 Error in computing current cost of equity/beta: -1 point Used wrong debt to equity ratio in unlevering beta: -0.5 point Did not unlever beta: -1 point Did not compute new cost of capital correctly: -1 point

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Sheet1

New cost of equity (capital) =

10.14%

Problem 2
Current value of equity = Current value of debt = Current firm value = Current cost of capital = New cost of capital = Annual savings = Change in value = New price per share = Number of shares bought back 400 200 600 10.50% 10% 3 37.5 43.75 4.57142857

Used equity value instead of firm value in computation: -1 poin Used old cost of capital to discount savings: -1 point Math errors: -0.5 point Did not compute new stock price correctly: -1 point (Okay if you used (1+g) in numerator)

Problem 3
Value of acquirer = 400 Errors on weights for duration of assets: -1 point Value of target = 400 Errors on weights for duration of debt: -1 point Duration of combined firm's assets = 5.5 Math errors: -0.5 point each Total debt of combined firm = 600 Duration of debt = (200/600)*4+(100/600)*6+(300/600)*X = 5.50 Duration of new debt = 6.33333333

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Sheet1

Alternatively, you can assume that the bank debt is at market value

Market Value of Debt =

153.94

If you do this, the cost of debt will be a weighted average of 7% and 8%, the cost of debt will be around 7.5%.

29.925

6.2

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Sheet1

Common errors 1. Reversed the cost of capital before and after in firm value change calculation. 2. Computed change in firm value incorrectly 3. Did not use after-tax cost of debt 4. Other math errors.

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Sheet1

32.6086956
Common errors 1. Misread the problem to read change by instead of change to. 2. Tried to change asset duration (why?) 3. Set up new debt incorrectly (had two unknowns with one equation) 4. Other errors.

ange, the duration remains 7.

25(2) + .75(10) = 8)

If you decide to use the effective tax rate, the rationale as to be that you do not have enough operating income to cover your interest expenses. owever, this will mean that the effective tax rate should be 10% in part b (since debt is doubled) you did this, I gave you full credit.

I gave full credit if you read the increase as 0.25% f the existing interest rate (I did take off half a point you read it as 25% You lost a point if you did not unlever and relever betas

78.2608696

Since the price at which you were buying back the stock was given, you annot divide by the total number of shares outstanding.

Transfer of wealth to stockholders selling back stock = (11.50-10)*21.739

ax cost of debt: -0.5

Forgot to adjust cost of equity : -1 Math errors: -0.5

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! Closely held, outperformed: Not target of a takeover - No immediacy ! ROC < Cost of capital : Don't invest ! History of paying dividends: Pay more dividends

the number of shares for buyback : -1 at you cannot divide by 50 if you are buying back at the current price)

ucture: Long term

0.25 points off for each mistake

erations: Mixed Currency You can pass inflation through Hence, floating rate debt and cashflows : Straight (Some of you made the argument for convertible because of intangibility of asset, but the cashflows are predictable escence: Short term

nty: Floating (but Competitive Industry: Fixed - So, I gave credit for both)

Stock buyback reduces the value of equity

If you had the NPV of the new investment, you can add that on.

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Sheet1

billion (1/3 of total debt)

d be in Euros

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This firm has no debt. This is the unlevered firm value.

1. Tried to force cost of capital approach through: -2 to -3 2. Wrong bankrupcty cost: -0.5 to -1 3. Other errors: -0.5 to -1 !Note that the stock price increases on the announcement to reflect what the firm will be worth after the transaction

t of bankruptcy)

1. Error in estimating current cost of equity: -0.5 2. Did not unlever beta: -0.5 3. Estimated new cost of equity wrong: -0.5 4. Used old cost of equity instead of capital in computing firm value ch 5. Did not compute PV of annual savings: -0.5 6. Did not compute increase in firm value at all: -1

4-.1109) 5000/.1109

Current Balance Sheet Transporation 0.75 Debt Tourism 0.25 Equity New Balance Sheet Transporation Tourism

1. Weighted businesses incorrectly: -0.5 0.5 2. Did not compute new weights after bu 0.5 3. Did not compute new dollar debt corre 4. Mixed up asset and debt durations: -1 0.75 ! Issued 0.25 of debt to fund doubling of 0.5

0.75 Debt 0.5 Equity

! Mechanical errors: -0.5 ! Tax effect: -0.5

! ! ! !

Unlevered with tax rate: -0.5 Relevered with wrong debt to equity: -0.5 Forgot to tax effect cost of debt: -0.5 Wrong debt ratio: -0.5

! Okay if you used (1+g) in numerator ! Change in firm value incorrect: -1 to -1.5

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! Gan/Loss on Sale: -1 to -1.5

! Duration for assets computed incorrectly: -1.5 to -2

! Dolalr debt after restructuring incorrect: -1 ! Breakdown of debt after restructuring: -1 to -1.5

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Grading Guidelines 1. Did not adjust the cost of equity at all: -1.5 points 2. Error in beta estimation: -0.5 to -1 point 3. Weights incorrect: -0.5 point 4. Forgot to after-tax cost of debt: -0.5 point

1. Cost savings per year incorrect: -0.5 point 2. PV of savings incorrect: -1 point 3. Math errors: -0.5 point each

1. Divided by existing number of shares: -1 point 2. Error in computing per share value: -.5 to -1 point

1. Asset duration incorrect: -0.5 to -1.5 points (depending) 2. Debt duration incorrect: -0.5 to -1 point 3. Math error: -0.5 point

! Wrong cost of debt : -.5 ! Math error: -.5

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! ! ! !

Wrong debt ratio: -0.5 to -1 Forgot to unlever and relever beta: -1 Used Debt to capital ratio to lever beta: -0.5 Wrong cost of cebt : -.5

ors are rational,

! Firm value computed incorrectly: -1 ! Did not lever beta: -1 ! Error in setting up new WACC: -.5 to -1

after =100

w debt/equity ratio

rm value, the answers will be different.

verage of just operating assets ! Computed beta of assets including cash: -1 s being used for retiring(Cash is used up after the transaction) debt) Did not comptue the new debt level right: -1 Other math errors: -.5 point ading before - Debt repaid tanding debt

! Wrong weights: -0.5 pt ! Did not after-tax debt: -.5

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! Used 40% as tax rate: -1 point ! Used 0% as tax rate: -0.5 point ! Math errors on tax rate: -0.5 point

if you use 40%

! Did not unlever beta: -0.5 point ! Left cost of equity untouched at 10%: -1 point ! Weights wrong: -0.5 to -1 point ! Wrong after-tax cost of debt: -0.5 (only if inconsistent with your answer to part b

! Did not set up firm value change : -2 to -3 point ! Used wrong firm value: -0.5 point ! Computed change in firm value wrong: -1 point ! No penalty for using (1+g)

!Duration of debt incorrect: -1 point ! Weigths for assets incorrect: -1 point

st of equity/beta: -1 point o in unlevering beta: -0.5 point

capital correctly: -1 point

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rm value in computation: -1 point count savings: -1 point

ice correctly: -1 point

of assets: -1 point of debt: -1 point

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Sheet1

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Sheet1

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Sheet1

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Sheet1

sset, but the cashflows are predictable and brand name has high marketable value)

Page 26

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l approach through: -2 to -3

e worth after the transaction

cost of equity: -0.5

y wrong: -0.5 ead of capital in computing firm value change: -0.5 ual savings: -0.5 n firm value at all: -1

. Weighted businesses incorrectly: -0.5 . Did not compute new weights after business changed: -0.5 . Did not compute new dollar debt correctly: -0.5 . Mixed up asset and debt durations: -1

Issued 0.25 of debt to fund doubling of tourism business

Page 28