Question Chapter 13

Pharos Papers is a large U.K. firm. Its cost of debt is 12%. The risk-free rate of interest on 10-year Treasury bonds is 5%. The expected return on the market portfolio is 9%. After effective taxes, Pharos effective tax rate is 20%. Its optimal capital structure is 65% debt

a. If Pharos beta is estimated at 1.2, what is its weighted average cost of capital?

b. If Pharos beta is estimated at 0.75, significantly lower because of the continuing profit prospects in the global paper sector, what is its weighted average cost of capital?

Question Chapter 14

Inter-KSA is a Saudi Arabian airline company specializing in internal flights that needs 50,000,000 for one year to finance working capital. The airline firm has two alternatives for borrowing:

a. Borrow 50,000,000 in Paris at 7% per annum

b. Borrow Saudi Riyals SAR 225,000,000 in Saudi Arabia at 9% per annum and then exchange the riyals at the cross rate of 1 EUR = 4.5 SAR.

At what ending exchange rate would Inter-KSA be indifferent between borrowing euros and borrowing Saudi riyals?

Question Chapter 18

Emancipation Co. (South Africa) expects to receive cash dividends from an Irish joint venture over the coming three years. The first dividend, to be paid December 31, 2015, is expected to be 1,000,000. The dividend is then expected to grow 15% per year over the following two years. The current exchange rate (December 31, 2014) is ZAR 13/. Emancipation Co.s weighted average cost of capital is 17.5%.

a. What is the present value of the expected euro dividend stream if the euro is expected to appreciate 6% per annum against the South African rand (ZAR)?

b. What is the present value of the expected dividend stream if the euro were to depreciate 5% per annum against the rand?

Question Chapter 15

Kraftstoff is a German-based company that manufactures electronic fuel-injection carburetor assemblies for several large automobile companies in Germany, including Mercedes, BMW, and Opel. The firm, like many firms in Germany today, is revising its financial policies in line with the increasing degree of disclosure required by firms if they wish to list their shares publicly in or out of Germany. The companys earnings before tax (EBT) is 483,500,000.

Kraftstoffsprimary problem is that the German corporate income tax code applies a different income tax rate to income depending on whether it is retained (45%) or distributed to stockholders (30%).

a. If Kraftstoff planned to distribute 50% of its net income, what would be its total net income and total corporate tax bills?

b. If Kraftstoff was attempting to choose between a 40% and 60% payout rate to stockholders, what arguments and values would management use in order to convince stockholders which of the two pay-outs is in everyones best interest?