I've attached both a Word document with the questions as well as the Excel template for Problem 4-4.

Thanks!

PROBLEM 4-1 Given Solution Legend Cost of debt Tax Rate Cost of equity Debt/EV 6% 30% 14% 20% = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output Solution Source Debt Equity Proportion After-tax cost WACC Product ed PROBLEM 4-2 Given MCD beta risk free rate MRP MCD debt MCD Ent Value MCD Debt beta Solution Legend 0.56 4.20% 5% 15% 80% 0.2 Solution MCD Ke a. 7.00% Unlevered Beta b. 0.49 = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output PROBLEM 4-3 Given Analysis of unlevered equity beta with risky debt beta = .30 Company Name Eastman Chemical Co. (EMN) Celanese Corp. (CE) Dow Chemical Company (DOW) a. Solution: Tax Rate 38% Levered Debt/Equity Assumed Equity Betas Capitalization Debt Betas 2.0200 42.69% 0.30 2.6300 82.93% 0.30 2.5000 29.07% 0.30 Unlevered Equity Betas Average b. Solution Analysis of Sterling Analysis based on simple average of unlevered equity betas beta unlevered D/E 20.00% beta debt 0.30 Solution Legend D/E beta levered 0.2 Total Debt 1,844,000 3,674,000 9,496,000 Market Cap 4,320,000 4,430,000 32,670,000 = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output PROBLEM 4-4 Given December 31, 2006 Balance Sheet Invested Capital (Book Values) (Market Values) Liabilities and Owner's Capital Current liabilities Accounts payable Notes payable Other current liabilities` Total current liabilities Long-term debt (8.5% interest paid semi-annually, due in 2015) Total liabilities Owners' capital Common stock ($1 par value per share) Paid-in-capital Accumulated earnings Total owners' capital Total liabilities and owners' capital Capital Market Data Treasury Bond Yield Market Risk Premium Unlevered equity beta (SIC 4924) Stock price Market capitalization Yield on debt Bond beta Short-term interest bearing debt New long-term debt total Tax Rate Solution Legend $ $ 8,250,000 7,266,000 15,516,000 $ $ 420,000,000 $ 434,091,171 $ 435,516,000 $ 434,091,171 $ 40,000,000 $ $ 100,025,000 255,000,000 395,025,000 830,541,000 $ $ 900,000,000 1,334,091,171 $ = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input 5.42% 5.00% 0.90 22.50 ### - = Crystal Ball Output 8.00% 0.30 $ 40.00% Solution Step 1: Evaluate the capital structure weights Enterprise Value = Market Capitalization + Debt Debt / Enterprise Value Equity / Enterprise Value Step 2: Estimate the costs of Financing Debt (after taxes) Equity Levered equity beta Step 3: Calculate the WACC WACC Source of Capital Debt Equity Capital Structure Weight (Proportion) After-Tax Cost WACC Weighted After-Tax Cost PROBLEM 4-5 Given Maturity Terms Face value Coupon rate Offering price 5 years Interest only $ 1,000 12.00% $ 800 Solution Solution Legend a. Promised YTM = = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output b. (Note: the discussion of this analysis is found in the Appendix to the chapter) Bond Rating Caa/CCC 10 Year Treasury Yield = 5.02% Coupon 12.00% Principal $ 1,000.00 Price $ 800.00 Maturity 5 years Recovery Rate 50.00% Default Probability 5.00% Default Cash Flows Year 0 1 2 3 4 5 1 2 3 4 5 Promised Cash Flow Promised YTM Expected yield to maturity if default occurs in this year Probability of default in each year Weighted YTM = E(YTM) x Pb of default Average YTM based on Expected Cash Flows YTM Spread Cost of Debt Spread Expected YTM = Cost of debt PROBLEM 4-6 Given Face value Current price Maturity Terms Coupon rate $ $ 1,000.00 1,081.26 8 years semi-annual interest only 7.25% Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output Solution Semi-annual YTM Annual YTM Note: The Effective Annual YTM accounts for semi-annual compounding, i.e., (1 + .0298)^2 - 1. PROBLEM 4-7 Given Solution Legend Today's Date Ford Motor Co. Coupon: Maturity: Term to Maturity Rating: Price: General Motors Corp. Coupon: Maturity: Term to Maturity Rating: Price: Feb-05 $ 6.375% 2/1/2029 24 years Baa1/BBB927.84 $ 8.375% 7/15/2033 28.5 years Baa2 /BBB1,061.25 Solution Ford Motor Co. Semi-annual YTM Annualized YTM General Motors = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output PROBLEM 4-8 Given Levered equity beta Treasure bond yield Market risk premium Tax rate Debt as % of Capital Structure Solution Legend 1.25 4.28% 3.50% 25.00% 25.00% 7.00% Solution a. Cost of equity b. Low ERP High ERP WACC with Low ERP Cap Str After-Tax Weights Costs Product Debt 25.00% Equity 75.00% WACC with High MRP Cap Str After-Tax Weights Cost Product Debt 25.00% Equity 75.00% = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output PROBLEM 4-9 Given Liabilities and Owners' Capital Current Liabilities Accounts payable Notes payable Other current liabilities` Total current liabilities Long-term debt (7.5% interest paid semianually, due in 2012) Total liabilities Owners' Capital Common stock ($1 par value per share) Paid-in-capital Accumulated earnings Total owners' capital Total liabilities and owners' capital US Treasury Bond Yield Estimated Market or Equity Risk Premium Current Share Price Market value of owners' equity Current yield on the firm's long-term debt Current yield on the firm's short-term notes Dollar value of short term notes outstanding Corporate tax rate December 31, 2009 Balance Sheet Invested Capital (Book Values) (Market Values) $ $ 17,550,000 20,000,000 22,266,000 59,816,000 $ 20,000,000 $ $ 650,000,000 709,816,000 $ $ 624,385,826 644,385,826 $ 20,000,000 200,025,000 255,000,000 475,025,000 1,184,841,000 $ $ 20,000,000 Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output $ 1,560,000,000 $ 2,204,385,826 5.42% 5.00% 78.00 $ 8.50% 9.00% 20,000,000 35% $ Solution a. What are Harriston's capital structure weights? Enterprise value = Market capitalization + Debt Notes payable / Enterprise Value Long-Term Debt / Enterprise Value Equity / Enterprise Value b. What is Harriston's cost of equity capital using the CAPM? After-Tax Cost of Sources of Capital Notes Payable (after-taxes) Long-term Debt (after-taxes) Levered equity beta Equity (using the CAPM) 1.20 c. What is Harriston's WACC? Source of Capital Notes Payable Long-term Debt Equity Capital Structure Weight (Proportion) After-Tax Cost WACC Weighted AfterTax Cost PROBLEM 4-10 a. Analysis of airline carrier's unlevered beta Tax Rate 38% Company Name American Airlines (AMR) Delta Airlines (DALR.PK) Jet Blue (JBLU) Southwest Airlines (LUV) Levered Equity Betas 3.2400 4.0500 (0.1100) (0.0100) Debt/Equity Capitalization 205.16% 5663.67% 106.22% 14.93% b. Analysis of Southwest Airlines Levered Beta Analysis based on simple average of unlevered equity betas beta unlevered D/E 14.93% c. Special concerns regarding estimation of cost of equity 1 - Tx Rate 62% Assumed Debt Betas 0.30 0.40 0.30 0.20 Average Unlevered Equity Betas beta debt beta levered 0.20 Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output PROBLEM 4-11 a. Fama French (FF) Coefficients Company Name SBC Communications (AT&T) Verizon Communications b 1.0603 1.1113 s -1.4998 -0.9541 h 1.0776 0.639 FF Cost of Equity CAPM Beta CAPM CAPM minus FF Cost of Cost of Equity Equity 0.62 0.79 SBC Communications (AT&T) Coefficients Coefficient Estimates b s h Risk Premia Product 5.00% 3.36% 4.40% Risk premium = + Risk free rate = = Cost of equity 5.02% Verizon Communications Coefficients b s h Coefficient Estimates Risk Premia 5.00% 3.36% 4.40% Risk premium = + Risk free rate = = Cost of equity b. Product Fama French estimate of the cost of equity CAPM estimate of the cost of equity Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output PROBLEM 4-12 Given Eastman Kodak Convertible Bonds Bond Facts Principal Amount Coupon Maturity Interest paid Conversion feature Solution Legend 1,000.00 6.750% 8 years 2 per year 32.2373 $ Price Information Current Bond Price Yield to Maturity Yield on Straight Debt Semi-Annual Yield $ = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output 1,277.20 This is the annual yield on convertible debt This is the effective annual yield found in Problem 4.3 This is the semi-annual yield from Problem 4.3 6.04% Solution $ Value % of Value Straight Bond Conversion Option Current Bond Price Estimate of the Cost of Convertible Bond Financing Marginal Tax Rate 0.0% Cost of Equity 13.5% % of Value Straight Bond Equity After Tax Cost of Convertible Bonds Before Tax cost of Convertible Bonds After Tax Cost Product PROBLEM 4-13 a. b. Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output