CHAPTER 17
Does Debt Policy Matter?
Answers to Practice Questions
1.
a.
The two firms have equal value; let V represent the total value of the firm.
Rosencrantz could buy one percent of Company B’s equity and borrow an amount equal to:
0.01 × (DA - DB) = 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)
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Total income is positive:
$113,049 – $108,536 = $4,513
4.
a.
Before refinancing: r r
⎛
A
A
⎞ ⎛ E
⎞ ⎛ 40
⎞
⎞ ⎛ 300
× r ⎟ +⎜
⎟ ⎜ D + E × rE ⎟ = ⎜ 40 + 300 × 0.05 ⎟ + ⎜ 40 + 300 × 0.10 ⎟
⎟ ⎝
D
D+E
⎠
⎠ ⎝
⎝
⎠ ⎝
⎠
=⎜
⎜
D
= 0.0941
After refinancing: r =r
E
b.
A
+ (r
A
⎛ D⎞
⎛ 80 ⎞
− r )⎜ ⎟ = 0.0941 + (0.0941 − 0.05)⎜
⎟ = 0.1077 = 10.77%
D ⎜ E⎟
⎝ 260 ⎠
⎝ ⎠
Jacques owns a portfolio with €60,000 of his own money and €40,000 borrowed at the risk-free rate. The weights for this portfolio are 1.67 invested in Rastignac stock and –0.67 invested in the risk-free asset. The expected return for the portfolio is:
(1.67 × 0.10) + (–0.67 × 0.05) = 0.1335 = 13.35%
138
Let βE-B and βE-A represent the equity beta for Rastignac before and after the refinancing, respectively. The beta for Jacques’ portfolio before the refinancing is: (1.67 × βE-B). Use the following equation to determine the relationship between βE-B and βE-A:
⎛ D
⎞ ⎛ E
⎞
βA = ⎜
⎜ D + E × β D ⎟ + ⎜ D + E × β E-B ⎟
⎟ ⎜
⎟
⎝
⎠ ⎝
⎠
⎞
⎞ ⎛ 300
⎛ 40 βA = ⎜
× β E-B ⎟
× 0⎟ + ⎜
340
340
⎠
⎠ ⎝
⎝
340
× βA β E-B =
300
Also:
⎞
⎞ ⎛ E
⎛ D βA = ⎜
⎟
⎟ ⎜
⎜ D + E × β D ⎟ + ⎜ D + E × β E- A ⎟
⎠
⎠ ⎝
⎝
⎞
⎞ ⎛ 260
⎛ 80 βA = ⎜
× β E-B ⎟
× 0⎟ + ⎜
⎠
__D___ 20. Brandon needs $480 to buy a TV and stereo system for his room. He received $60 in cash for birthday presents. He plans to save $30 per week from his part-time job. To find how many weeks w it will take to have $480, solve 60 + 30w = 480. Type your answer in the blank to the left.
All employees analyze their environment and strive to be recognized and rewarded for their hard work and dedication they put into the company, in a word they are seeking justice. Justice can be defined as a person receiving what they feel they are entitled to and if they do not receive what they deserve the situation may board on injustice. Unfortunately in today’s society justice and appreciation are not given out to all those deserving (Pinder, 1998). A major problem to address is how to keep the motivation level high in a company when the employees do not feel appreciated.
P B - 2 0 0 6 - 2 | M a y 17, 2 0 0 6
I found the secret formula, it was (w+L)-2 but w/l had to be reduced so it
A(-2, 2) becomes A'(5, 1) , B(-2, 4) becomes B'(5, 3) , C(2, 4) becomes C'(9, 3) , D(2, 2) becomes D'(9, 1)
Ba 2+ (aq) + 2 NO3- (aq) + Na+ (aq) + OH- (aq) Ba(OH)2 (s) + Na+ (aq) + 2 NO3- (aq)
Over the years, there are many controversies over equity method within IAS 28 Investments in Associates and Joint Ventures. The controversies basically lay on the vagueness of application on equity method; whether it serves as one-line consolidation (consolidation technique), measurement basis or a mixture of both. This paper divides into 3 parts. First part gives an illustration on this accounting issue in IAS 28 as well as the explanation, second part compares and contrasts the financial reports of two assigned entities and the final part discusses the qualitative characteristics of their financial reports.
We will want to compute e from d, p, and q, where e is the multiplicative inverse of d.That means we need to satisfy
The Standard Oil Company of California(Socal) is trying to determine how much to bid on the Gulf Oil Corporation. George Keller, the CEO of Socal, would need to borrow 14 billion dollars in order to make a substantial bid. While banks are willing to lend the money because of Socal's low to debt ratio, the loan would put the company in a highly leveraged position. In order to alleviate that debt, some of Gulf's assets could be sold. Keller has to consider the value of Gulf's exploration and development program when calculating future returns. Two billion dollars were being spent on the exploration and development program. This money could instead be used to reduce the debt if Socal acquired the company. However, the exploration program
2(X4 + X5 + X6 + X7 + X10 + X11 + X16 + X17 + X18 + X27 + X28) – (X1 + X2 +X3
6 x C-H (412) + 2 x C-O (360) + 3 x O-H (463) + 3 x O=O (498) 4 x C=O (805) + 8 x H-O (463)
Using the same market risk premium and risk free rate (5.5% & 4.62% respectively) given in the case, the averaged beta of 1.40, the pretax cost of debt of 7.65%, and the weighted average of debt & equity, the products & systems
∏i = (Pe + 40 - 100) x 100 = 100 x Pe –6,000 -------------------- [1]
For a trust instrument to be valid and effective, it must be properly constituted. For a trust to be deemed as completely constituted, all of the relevant formalities must have been satisfied by the settlor, hence the legal title of the property must transfer to the trustees. The reason for a conveyance of property to the hands of trustee is explained in Milroy v Lord (1862) by Turner L.J. is that a valid and effectual voluntary settlement will exist, when the settlor have done everything which was necessary according to the nature of property comprised in the settlement, which is to transfer that particular property to the trustee. This requirement of constitution of trust is clear and straightforward, the