Complete The Homework Assignment Instructions 130797

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Instructions instructions nameto Complete the Homework Assignments In T Instructionsinstructionsnameto Complete the Homework Assignments In T Instructions Instructions NAME: To complete the homework assignments in the templates provided: 1. The question is provided for each problem. You may need to refer to your textbook for additional information in a few cases. 2. You will enter the required information into the shaded cells. 3. The cells are coded: a) T requires a text answer. Essay questions require references; use the textbook. b) C requires a calculation, using Excel formulas or functions. You cannot perform the operation on a calculator and then type the answer in the cell. You will enter the calculation in the cell, and only the final answer will show in the cell. I will be able to review your calculation and correct, if necessary. c) F requires a number only. In some problems, a “Step 1” is added to help you solve the problem. d) Formula requires a written formula, not the numbers. For example, the rate of return = [(1 + nominal)/ (1+inflation)] - 1, or D (debt) + E (equity) = V (value). 4. Name your assignment file as "lastnamefirstinitial-FINC600-Week#", and submit by midnight ET, Day 7. P9-2 Problem 9-2 A company is 40% financed by risk-free debt. The interest rate is 10%, the expected market risk premium is 8%, and the beta of the company’s common stock is 0.5. Risk Free Debt Interest Rate Market Risk Premium Beta Taxes 40% 10% 8% 0.5 35% a. What is the company cost of capital? b. What is the after-tax WACC, assuming that the company pays tax at a 35% rate? Answers: Step 1: r(d)= F r(e)= C D/V C TIP: D + E = V E/V C Step 2: a. Formula (in words) Calculation Cost of Capital T C b. WACC T C Instructions: Please refer to your book for assistance with your homework. Post your work in the worksheet. Highlight your final answer. Principles of Corporate Finance, Concise, 2nd Edition P9-16 Problem 9-16 What types of firms need to estimate industry asset betas? How would such a firm make the estimate? Describe the process step by step. Answer: What types of firms need to estimate industry asset betas? T How would such a firm make the estimate? Describe the process step by step. T Instructions: Please refer to your book for assistance with your homework. Post your work in the worksheet. Highlight your final answer. P10-2 Problem 10-2 Explain how each of the following actions or problems can distort or disrupt the capital budgeting process. a. Overoptimism by project sponsors. b. Inconsistent forecasts of industry and macroeconomic variables. c. Capital budgeting organized solely as a bottom-up process. Answer: a. T b. T c. T Instructions: Please refer to your book for assistance with your homework. Post your work in the worksheet. Highlight your final answer. P10-14 Problem 10-14 Suppose that the expected variable costs of Otobai’s project are ¥33 billion a year and that fixed costs are zero. a. How does this change the degree of operating leverage (DOL)? b. Now recompute the operating leverage assuming that the entire ¥33 billion of costs are fixed. Answers: See page 243, Table 10.1, of textbook for additional information. Copy is also provided below. DOL Formula Fixed Costs Calculation a. 1 + (Fixed cost + depreciation) / operating profit F C b. 1 + (Fixed cost + depreciation) / operating profit F C Instructions: Please refer to your book for assistance with your homework. Post your work in the worksheet. Highlight your final answer. Principles of Corporate Finance, Concise, 2nd Edition

Paper For Above instruction

The assignment encompasses a comprehensive review of key financial concepts, involving the calculation of the company's weighted average cost of capital (WACC), estimating industry asset betas, analyzing factors that disrupt capital budgeting, and evaluating the degree of operating leverage (DOL) in various scenarios. Each component requires a thorough understanding of financial theory, application of relevant formulas, and critical interpretation of results based on provided data.

Part 1: Determining the Company’s Cost of Capital and WACC

The first problem (P9-2) involves calculating the company's cost of capital and its after-tax Weighted Average Cost of Capital (WACC). Given data includes the company's capital structure, which comprises 40% risk-free debt and 60% equity, with a debt interest rate of 10%, a market risk premium of 8%, and a beta of 0.5 for the stock. The corporate tax rate is 35%. The calculation starts with determining the cost of debt (rd) which is 10%. The cost of equity (re) is computed using the Capital Asset Pricing Model (CAPM): re = rf + β × Market Risk Premium = 0.10 + 0.5 × 0.08 = 0.10 + 0.04 = 0.14 or 14%.

The weighted average cost of capital before taxes (WACC) integrates the proportions of debt and equity: WACC = (D/V) × rd × (1 - Tax rate) + (E/V) × re. Applying the values: D/V = 0.4, E/V = 0.6, yields WACC = 0.4 × 0.10 × (1 - 0.35) + 0.6 × 0.14 = 0.4 × 0.10 × 0.65 + 0.6 × 0.14 = 0.026 + 0.084 = 0.11 or 11%. This is the after-tax WACC, which accounts for the tax shield on debt.

Part 2: Estimating Industry Asset Betas

The second segment (P9-16) explores which firms should estimate industry asset betas and how to do so systematically. Industries with high capital intensity, rapid technological change, or significant exposure to macroeconomic factors need precise industry asset betas for risk assessment. The estimation process begins with collecting comparable firms’ data, calculating their asset betas using stock betas adjusted by leverage, and then deriving an industry average. The steps include:

  1. Identify comparable firms within the same industry.
  2. Gather data on their equity betas, debt levels, and equity/debt ratios.
  3. Unlever each firm’s equity beta to derive the asset beta: Asset Beta = Equity Beta / [1 + (1 - Tax rate) × (Debt/Equity)].
  4. Calculate the average asset beta across the comparables, which provides the industry asset beta estimate.

This process enables firms to refine their risk estimates beyond relying solely on individual company data, especially when diversifying risk assessments or considering new project investments.

Part 3: Disruptors of Capital Budgeting

The third discussion (P10-2) focuses on factors that distort capital budgeting decisions. Overoptimism by project sponsors can lead to inflated estimates of cash flows and project benefits, skewing investment desirability. Incomplete or inconsistent forecasts of macroeconomic variables, such as inflation, interest rates, or industry growth, introduce errors and biases into project appraisal. Additionally, organizing capital budgeting solely as a bottom-up process might neglect strategic alignment, market conditions, and corporate risk appetite, leading to suboptimal resource allocation. These issues emphasize the necessity of comprehensive, disciplined processes incorporating multiple viewpoints and rigorous forecasting methods to ensure reliable investment decision-making.

Part 4: Operating Leverage Analysis

The final problem (P10-14) evaluates how fixed vs. variable costs influence the degree of operating leverage (DOL). When variable costs are ¥33 billion annually with zero fixed costs, the DOL decreases because operating leverage is largely driven by fixed costs. Using the DOL formula: DOL = 1 + (Fixed Costs + Depreciation) / Operating Profit, if fixed costs are zero, the DOL simplifies to 1, indicating minimal operating leverage and higher operational flexibility. However, if all costs are fixed at ¥33 billion, the DOL increases significantly, reflecting a higher sensitivity of operating income to sales fluctuations. Understanding these dynamics helps firms manage risk and optimize operational structure based on their cost composition.

References

  • Brealey, R. A., Myers, S. C., & Allen, F. (2020). Principles of Corporate Finance (12th ed.). McGraw-Hill Education.
  • Damodaran, A. (2012). Investment Valuation: Tools and Techniques for Determining the Value of Any Asset. Wiley.
  • Ross, S. A., Westerfield, R., & Jaffe, J. (2019). Corporate Finance (12th ed.). McGraw-Hill Education.
  • Brigham, E. F., & Ehrhardt, M. C. (2019). Financial Management: Theory & Practice (15th ed.). Cengage Learning.
  • Copeland, T., Weston, J. F., & Shastri, K. (2005). Financial Theory and Corporate Policy. Pearson.
  • Kaplan, R. S., & Norton, D. P. (2001). The Strategy-Focused Organization. Harvard Business Review Press.
  • Franklin, M., & Lewis, C. (2018). Leveraging Risk Management in Corporate Decision-Making. Journal of Business Research, 94, 157-165.
  • Damodaran, A. (2010). The Cost of Capital, Estimation and Implications. Financial Management.
  • Fama, E. F., & French, R. (2004). The Capital Asset Pricing Model: Theory and Evidence. Journal of Economic Perspectives, 18(3), 25-46.
  • Modigliani, F., & Miller, M. H. (1958). The Cost of Capital, Corporation Finance, and the Theory of Investment. American Economic Review, 48(3), 261-297.

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