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701 Module 4 Practice 1. Your firm can generate 300 in ebit per year forever. You are twice as risky as the average firm. The market is expected to earn 12% and the risk free rate is 2%. Find the value of the firm and the wacc if there are no taxes and you use no debt. (1363.636, .22) 2. Same firm as above, but let the tax rate be 50%. Find the wacc and firm value. (.22, 681.818) 3. Same firm as above, but the firm uses 300 in 2% debt. There are no taxes. Find value and wacc (1363.636, .22) 4. Same as above but taxes are 50%. (831.818, .1803) 5. What is the beta of the firm above? (2.564) Your firm uses 40% equity. Last year you paid total dividends of 300M on net income of 900M. You think that net income will grow to 990M this year. You have 600M in good projects. 6. Find the constant growth dividend (10% growth rate). (330) 7. Find the constant payout dividend. (330) 8. Find the residual dividend. (750) Practice solutions (Don't look at these until you have tried them yourselves) 1. Use capm to find r(s). .02+2*(.12-.02)=.22 EBIT/WACC=300/.22=1363.636 2. EBIT*(1-t)/WACC=(300*.5)/.22=681.8182 3. V(L)=V(U)+t*D=1363.636+0*300=1363.636 R(sl)=.22+(.22-.02)(300/1063.636)(1-0)=.2764 Wacc=(300/1363.636)*(.02)*(1)+(1063.636/1363.636)*.2764=.0044+.2156=.22 4. V(L)=681.8182+.5*(300)=831.8182 R(sL)=.22+(.22-.02)*(300/531.8182)*(.5)=.2764 (300/831.8182)*(.02)*(.5)+(531.8182/831.8182)*.2764=.0036+.1767=.1803 Another check yourself: v=((300)*(.5))/.1803=831.88...rounding issues 5. 6. 7. 8. B(L)=B(U)*((1+(300/531.8182)*(.5))=2.5641 300*(1.1)=330 990*(300/900)=330 RE=600*.4=240 990-240=750