Kindly help solve problems 4-8 and 5-7 and please see attached documents below for the questions and problems templates

PROBLEM 4-1 Given As a summer intern you are asked to prepare a spreadsheet calculating the project free cash flow associated with a project your employer is considering. Initially your boss assumes that no debt would be used to fund the project. During your presentation to the committee that evaluates projects, you learn that, in fact, the project will be financed with 25% debt. Are the following statements are either true or false (explain your answer): 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 4-2 Given Describe the difference between a promised and an expected cash flow. If promised cash flows tend to be higher than expected cash flows should they be discounted at rates that are higher or lower than the firm's WACC? 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 4-3 Given Cost of debt Tax Rate Cost of equity Debt/EV 6% 30% 14% 20% Part a. Solution Source Debt Equity Proportion After-tax cost Product WACC 0.00% Part b. Solution Source Debt Equity Proportion After-tax cost Product WACC 0.00% 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 4-4 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: To convert the semi-annual YTM to it's annual YTM equivalent we perform the following computation: = (1 + .0298)^2 - 1. 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 onvert the semi-annual YTM to it's annual YTM equivalent we e following computation: = (1 + .0298)^2 - 1. PROBLEM 4-5 Given Solution Leg McDonald's levered beta Risk free rate Market risk premium McDonald's debt McDonald's Enterprise Value McDonald's Debt beta $ $ 0.56 4.20% 5% 15.00 billion 80.00 billion 0.2 Solution McDonald's Ke a. Unlevered Beta 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 PROBLEM 4-6 Given Levered equity beta Treasure bond yield Market risk premium Tax rate Debt as % of Capital Structure Solution L 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 proble = Formula/Calculation/A = Qualitative analysis o = Goal Seek or Solver c = Crystal Ball Input = Crystal Ball Output 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 4-7 Given Analysis of unlevered equity beta with risky debt beta = .30 Company Name Eastman Chemical Co. (EMN) Celanese Corp. (CE) Dow Chemical Company (DOW) Tax Rate 38% Levered Debt/Equity Assumed Equity Betas Capitalization Debt Betas 1.7900 30.77% 0.30 1.9800 23.55% 0.30 1.7100 21.60% 0.30 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 D/E 0.2 a. Solution: Unlevered Equity Betas beta levered Solution Legend 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 4-8 Given December 31, 2014 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 $ $ 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 $ 5.42% 5.00% 0.90 22.50 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) Debt/Equity Ratio ### Equity Levered equity beta Step 3: Calculate the WACC WACC Source of Capital Debt Equity Capital Structure Weight (Proportion) After-Tax Cost WACC 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 Weighted After-Tax Cost PROBLEM 4-9 Given Maturity Terms Face value Coupon rate Offering price 5 years Interest only $ 1,000 12.00% $ 800 Solution a. Promised YTM = 18.46% 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 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 1 2 3 Solution Legend = Value given in problem = Formula/Calculation/Analysis = Qualitative analysis or Short a = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output Cash Flows 4 5 Promised Cash Flow Promised YTM Expected YTM = Cost of debt 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 4-10 Given Face value Current price Maturity Terms Coupon rate $ $ 1,000.00 1,000.00 29 years semi-annual interest only 4.75% Solution a. Promised YTM with bond price = $1,000 and 29 years to maturity Semi-annual YTM Annual YTM b. Revised bond price given a 10% increase in the YTM on the bonds % Change in YTM Revised YTM Semi-annual YTM New Bond Price % Change in Bond Price c. Revised bond price given a 10% increase in the YTM for 15 year bonds % Change in YTM Revised YTM Semi-annual YTM New Bond Price % Change in Bond Price 10% d. Bond price volatility and changes in YTM for different maturity bonds A 10% increase in the YTM of the 29 year bond led to a 6.97% drop in its price whereas a similar increase in YTM for the 15 year bond resulted in a smaller (-4.84%) drop in it's price. This increased bond price volatility is a reflection of the durations of the two bonds'. Although bond duration is not discu its effect on bond prices is easily explained in the context of this simple bond pricing problem. Although bond duration is not discussed in the text, 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 d PROBLEM 4-11 Given Solu 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. General Motors Semi-annual YTM Annualized YTM Comments: The bonds of both these companies were on the edge of junk status at the time of the analysis so the YTM calculated above is probably a little higher than the expected YTM. To account for the probability of default and less than 100% recovery rate we would need to estimate both these quantities and incorporate them into our analysis in the manner discussed in the Appendix. 1 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 December 31, 2014 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 Balance Sheet (Book Values) $ Invested Capital (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 $ $ $ $ 5.42% 5.00% 78.00 1,560,000,000 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) 20,000,000 $ 1,560,000,000 $ 2,204,385,826 c. What is Harriston's WACC? Source of Capital Notes Payable Long-term Debt Equity Capital Structure Weight (Proportion) After-Tax Cost WACC 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 Weighted AfterTax Cost 0.0000% PROBLEM 4-13 a. Analysis of airline carrier's unlevered beta Company Name American Airlines (AMR) Delta Airlines (DALR.PK) Jet Blue (JBLU) Southwest Airlines (LUV) (Note 1) Levered Equity Betas 1.01 0.96 0.73 0.97 Debt/Equity Assumed Debt Capitalization Betas 25.61% 0.30 21.77% 0.40 58.26% 0.30 -6.16% 0.20 Average b. Analysis of Southwest Airlines Levered Beta Analysis based on simple average of unlevered equity betas Unlevered Equity Beta (Asset Beta) D/E -6.16% Debt beta 0.20 beta levered -0.01 c. Special concerns regarding estimation of cost of equity Note 1. Southwest has a negative debt to equity ratio because the firm's cash balance exceeds its interest bearing deb Unlevered Equity Betas 0.87 0.86 0.57 1.02 ce exceeds its interest bearing debt. 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 4-14 a. Fama French (FF) Coefficients Company Name SBC Communications (AT&T) Verizon Communications b 1.0603 1.1113 s -1.4998 -0.9541 FF Cost h of Equity 1.0776 8.00% 0.639 8.16% CAPM CAPM Cost of Beta Equity 0.62 6.10% 0.79 6.95% SBC Communications (AT&T) Coefficients b s h Coefficient Risk Estimates Premia Product 1.0603 5.00% (1.4998) 3.36% 1.0776 4.40% Risk premium = + Risk free rate = 3.00% = Cost of equity Fama French estimate of the cost of equity CAPM estimate of the cost of equity Verizon Communications Coefficients b s h Coefficient Risk Estimates Premia Product 1.1113 5.00% (0.9541) 3.36% 0.6390 4.40% Risk premium = + Risk free rate = 3.00% = Cost of equity b. The coefficients on a particular Fama French factor indicate the level of exposure of the company to that factor. Low (high) values of the coefficient imply low (high) exposures. A negative sign implies that including the company in a portfolio reduces the risk to the corresponding Fama French factor. CAPM minus FF Cost of Equity -1.90% -1.21% CAPM estimate of the cost of equity ny to that factor. Low g the company in a 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 4-15 Given Eastman Kodak Convertible Bonds Bond Facts Principal Amount Coupon Maturity Interest paid Conversion feature Price Information Current Bond Price Yield to Maturity Yield on Straight Debt Semi-Annual Yield Solutio $ 1,000.00 6.750% 8 years 2 per year 32.2373 $ 1,277.20 This is the annual yield on conve This is the effective annual yield This is the semi-annual yield from 6.04% Solution $ Value % of Value Straight Bond Conversion Option Current Bond Price Estimate of the Cost of Convertible Bond Financing Marginal Tax Rate 30.0% 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 M 4-15 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 This is the annual yield on convertible debt This is the effective annual yield found in Problem 4.4 This is the semi-annual yield from Problem 4.4 PROBLEM 4-16 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 PROBLEM 4-17 a. Estimated Firm or Asset Beta Company Name Comp #1 Comp #2 b. Estimation of the cost of equity Analysis based on simple average of unlevered equity betas beta unlevered Risk free rate Market risk premium Equity beta (levered) Estimated cost of equity c. Estimate of the WACC Before tax cost of debt Tax rate Debt Equity Levered Debt/Equity Equity Betas Capitalization 1.50 2.10 D/E 20.00% 15.00% 30.00% Estimated Asset Beta = beta debt 0.20 3.00% 5.00% - 4.00% 35.00% Proportions 20.00% 80.00% After-tax Cost WACC OBLEM 4-17 Assumed Debt Betas 0.20 0.20 Estimated Asset Beta = beta levered Product Unlevered Equity Betas 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 5-1 Thought Question: Explain how a firm might use the divisional WACC approach to avoid underinvesting in divisions with more risky projects and over-investing in divisions with less risky projects. Answer: Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer r = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output PROBLEM 5-2 THOUGHT QUESTION Mango Services Company has a corporate WACC of 10%. You propose investing in a new project with an IRR of 8%. Your boss asks, "how can the project possibly have a positive NPV if its IRR is less than our WACC?" What is your answer? Answer: . Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer r = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output PROBLEM 5-3 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 5-4 Given Debt Ratio (current) Equity Ratio (current) Cost of Debt Market Risk Premium Equity Beta Debt Beta Risk Free Rate Corporate Tax Rate Solution L 30.0% 70.0% 6.0% 5.25% 1.20 0.29 4.5% 35% Solution a. Cost of Equity b. WACC c. Unlevered beta Debt to Equity Ratio Levered Equity Beta Cost of Equity Debt Ratio Equity Ratio Revised WACC = Value given in problem = Formula/Calculation/Analysis = Qualitative analysis or Short = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output Note: This analysis presumes that the cost of deb financing is "sticky" in the sense that it varies in a discrete fashion with the firm's bond rating. In oth words, even though the firm has increased its use of financial leverage from 30 to 40% the cost of debt(and the debt beta do not change. On the other hand, the cost of equity does change since the higher leverage implies a higher equity beta. 40.0% 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 alysis presumes that the cost of debt icky" in the sense that it varies in a n with the firm's bond rating. In other ough the firm has increased its use erage from 30 to 40% the cost of ebt beta do not change. On the e cost of equity does change since erage implies a higher equity beta. PROBLEM 5-5 Hurdle rates can be used to avoid the problem of managers being over-optimisitic. So 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 5-6 Solutio 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 5-7 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 PROBLEM 5-8 a. First Solve for EBIT that is consistent with Project FCF (see rows 23-27). Initial cost Project FCF (1-30 yrs) Book debt $ $ $ Solution Legen 100,000,000.00 8,000,000.00 80,000,000.00 Assume capex = depreciation Assume perpetual cash flows 35.00% tax rate 7.00% Interest rate on debt 9.94% cost of equity EBIT Interest EBT Tax (35%) NI Equity FCF Given Project FCF of $8,000,000, and assuming capex = depreciation, we compute the EBIT that would result in a PFCF of $8,000,000. Note under capex = depreciation, NOPAT = Project FCF. Apply goal seek tool to "Diff" cell by varying the cell contents of EBIT. EBIT Tax on EBIT NOPAT Project FCF Diff $0.00 Apply Goal Seek Tool to this cell (C27) by varying EBIT cell (C23) s b. AFTER 30 iterations the imputed value of equity converges to the trial value of the equity Trial value Iteration Number Book debt of equity WACC 1 $ 80,000,000.00 $ 20,000,000.00 2 $ 80,000,000.00 $ 3 $ 80,000,000.00 $ 4 $ 80,000,000.00 $ 5 $ 80,000,000.00 $ 6 $ 80,000,000.00 $ 7 $ 80,000,000.00 $ 8 $ 80,000,000.00 $ 9 $ 80,000,000.00 $ 10 $ 80,000,000.00 $ 11 $ 80,000,000.00 $ 12 $ 80,000,000.00 $ 13 $ 80,000,000.00 $ 14 $ 80,000,000.00 $ 15 $ 80,000,000.00 $ 16 $ 80,000,000.00 $ 17 $ 80,000,000.00 $ 18 $ 80,000,000.00 $ 19 $ 80,000,000.00 $ 20 $ 80,000,000.00 $ - 21 22 23 24 25 26 27 28 29 30 31 32 33 $ $ $ $ $ $ $ $ $ $ $ $ $ 80,000,000.00 80,000,000.00 80,000,000.00 80,000,000.00 80,000,000.00 80,000,000.00 80,000,000.00 80,000,000.00 80,000,000.00 80,000,000.00 80,000,000.00 80,000,000.00 80,000,000.00 $ $ $ $ $ $ $ $ $ $ $ $ $ - Project WACC The same iterations could be worked out in one step using SOLVER TOOL Trial value of Iteration Number Book debt equity WACC 1 $ 80,000,000.00 $ 43,863,179.07 Apply solver tool. Set target cell to be H73, click on "value of 0" and set changing cells to D73. c. We solve this part using solver Project FCFs are growing at 2.5% Iteration Number 1 $ Book debt 80,000,000.00 2.50% Trial value of equity $ 85,483,870.97 Project WACC WACC BLEM 5-8 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 FCF of $8,000,000, and assuming eciation, we compute the EBIT that n a PFCF of $8,000,000. Note = depreciation, NOPAT = Project oal seek tool to "Diff" cell by varying nts of EBIT. to this cell (C27) by varying EBIT cell (C23) so that Diff = $0.00. ue of the equity Value of project based on WACC Imputed value of equity diff $ 20,000,000.00 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ - $ $ $ $ $ $ $ $ $ $ $ $ $ - Project Value Value of project based on WACC Imputed value of equity diff on "value of 0" and set changing cells to D73. Value of project based on WACC Imputed value of equity Project Value diff PROBLEM 5-9 Given Cost of equity After-tax cost of debt Debt to value WACC 12.00% 4.80% 40.00% 9.12% Solution a. Project New (Omaha) Investment Debt capacity Operating costs D/V at capacity Project WACC Project Modernize (Charleston) Investment Debt capacity Operating costs D/V at capacity Project WACC $ $ 50,000,000 12,000,000 low $ $ 30,000,000 5,000,000 high b. If the project is equity financed, the debt capacity would be 40% (existing capacity) Project WACC Solution 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 5-10 Given Cost of equity Cost of debt Tax rate 10.00% 5.00% 35.00% Solution a. Project A (expand) Up-front initial investment Annual fixed costs Variable costs Contribution margin Degree of Operating Leverage Debt capacity Debt to value ratio at capacity Project WACC Project B (outsource) Up-front initial investment Annual fixed costs Variable costs Contribution margin Degree of Operating Leverage Debt capacity Debt to value ratio at capacity Project WACC b. Solution L $ $ $ $ $ $ 3,200,000 200,000 20.00% 80.00% high 1,200,000 3,400,000 50,000 40.00% 60.00% low 2,400,000 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 4-8 THREE-STEP PROCESS FOR ESTIMATING A FIRM'S WACC, Compano inc. was founded in 1986 in Baytown, Texas. The firm provides oil-field services to the Texas Gulf Coast region, including the leasing of drilling barges. Its balance sheet for year-end 2014 describes a firm with 830,541,000 in assets (book values) and invested capital of more than 1.334 billion. December 31, 2014 Liabilities and owner's capital Balance sheet Invested Capital (Book value) (Market values) Current Liabilities Accounts Payable $ Notes payable 8,250,000 0 0 Other current liabilities $ 7,266,000 - Total current liabilities $ 15,516,000 - Semiannually, due in 2015) $420,000,000 $ 434,091,171 Total liabilities $435,516,000 $ 434,091,171 Long term debt (8.5% interest paid Owners' capital Common stock ($1 par value per share) $ 40,000,000 Paid in capital 100,025,000 Accumulated earnings 255,000,000 Total owners' capital $395,025,000 Total liabilities and owners' capital 830,541,000 $ 900,000,000 $1,334,091,171 Compano's executive management team is concerned that its new investments be required to meet an appropriate cost of capital hurdle before capital is committed. Consequently, the firm's CFO has initiated a cost of capital study by one of his senior financial analysts, Jim Tipolli. Jim's first action was to contact the firm's investment banker to get input on current capital costs. Jim learned that although the firm's current debt capital required an 8.5% coupon rate of interest (with annual interest payments and no principal repayments until 2025), the current yield on similar debt had declined to 8% if the firm were to raise debt funds today. When he asked about the beta for compano's debt, Jim was told that it was standard practice to assume a beta of .30 for the corporate debt of firms such as Compano. A. What are Compano's capital structure weights for debt and equity that should be used to compute its cost of capital? B. Based on Compano's corporate income tax rate of 40%, the firm's mix of debt and equity financing, and an unlevered beta estimate of .90. What is Compano's levered equity beta? (Hint: Compano plans on maintaining the mix of financing over time). C. Assuming a long term U.S. Treasury bond yield of 5.42% and an estimated market risk premium of 5%, what should Jim's estimate of Compano's cost of equity be if he uses the CAPM? D. What is your estimate of Compano's WACC? 5-7 Divisional WACC in 2006, Anheuser-Busch Companies Inc. (BUD), engaged in the production and distribution of beer worldwide, operating through four business segments: Domestic Beer, International Beer, Pakaging, and Entertainment. The Domestic Beer segment offers beer under Budweiser, Michelob, Busch, and Natural brands in the United States, in addition to a number of specialty beers including nonalcohol brews, malt liquors, and specialty malt beverages, as well as energy drinks. The International Beer segment markets and sells Budweiser and other brands outside the United States and operates breweries in the United Kingdom and China. In addition, the International beer segment negotiates and administers license and contract brewing agreements with various customers, buys and sells used aluminum beverage containers, and recycles aluminum containers. Finally, the Entertainment segment owns and operates theme parks. In 2005, Anheuser-Busch reported the following segment revenues and net income: ($ millions Domestic Beer Inter Beer Packaging Entertai 10,121.00 864.00 1,831.50 904.40 Income taxes 2,293.40 70,10 120.40 215.10 Equity income 0 147.10 0 0 Net income 1,421.90 433.70 74.60 133.40 2005 Gross sales Income before Assume that you have just been charged with the responsibility for evaluating the divisional cost of capital for each of the business segments. A. Outline the general approach you would take in evaluating the cost of capital for each of the business segments. B. Should the fact that $1,156 million of the Packaging segment's revenues come from internal sales to other Busch segments affect your analysis? If so, how