need help with current event essay-Middle America realm Hi (this realm I need to write about consists of mexico, belize, guatemala, honduras, el salvidor and nicaragua) Please write a summary that ties these 2 stories together: http://abcnews.go.com/US/wireStory/judge-us-violates-agreement-detention-immigrant-kids-32679960 http://abcnews.go.com/US/wireStory/documents-deportation-shelved-year-honduran-boy-32577012 AND follows the instructions below. ---------------------------- Step 1. Search the Internet for a recently published news article that describes a recent event that occurred in the Middle American realm and that you can relate to geography (i.e., physical, cultural, political, economic). Please Note: The event MUST have occurred during the past 90 days; the news article also must have been published during the past 90 days. Step 2. Summarize the event (500 - 650 words), citing appropriate sources in APA format. Include the cited sources in the references, also in APA format. **Analyze the short- and long-term geographic importance of the event within the community, region, and nation in which the event occurred.** **Analyze the geographic importance of the event on one or more countries that are outside the realm in which the event occurred.** **Describe what the event reveals about culture, lifestyle, politics, economic conditions, and values (personal, community, or national), etc., of the people in the region or country in which the event occurred.** FIN 508 Assignment 7 _____________________________________________________________________________ 1 7.1. Sicily Pharmaceuticals has $10 million in debt and $70 million in equity. Its tax rate is 30%, cost of debt 8%, and beta 1.5. The riskless rate is 5% and the expected return on the market 12%. Sicily would like to start a newspaper using its existing capital. Sardinia Times is a daily newspaper. Sardinia has $12 million in debt and $40 million in equity, with tax rate of 32% and beta 1.25. Find the required rate of return for Sicily in the new venture. 12.07% ♥ First, consider Sardinia Times, which publishes a newspaper. Its unleveraged beta is given by (11.3) as βU(Sardinia) = βL 1 + (1 − t) B/S = 1.25 1 + (1 − .32)(12/40) = 1.038205980 This gives a measure of the risk inherent in the newspaper business. Next, releverage it using Sicily’s financial data. βL(Sicily) = βU [1 + (1 − t) B S ] = 1.038205980 [1 + (1 − 0.3)(10/70)] = 1.142026578 Use CAPM, equation (7.7) to find the cost of equity for Sicily, ke = .05 + 1.142026578 (.12 − .05) = .1299418605 Finally, find the risk-adjusted WACC of Sicily for this venture. Use (9.5), WACC = (1 − .3)(.08)(10/80) + .1299418605 (70/80) = .1206991279 = 12.07% ♥ 7.2. Consider the financial information of Cyprus Hotels and Corsica Inns, the two hotel chains. .

1. need help with current event essay-Middle America realm
Hi
(this realm I need to write about consists of mexico, belize,
guatemala, honduras, el salvidor and nicaragua)
Please write a summary that ties these 2 stories together:
http://abcnews.go.com/US/wireStory/judge-us-violates-
agreement-detention-immigrant-kids-32679960
http://abcnews.go.com/US/wireStory/documents-deportation-
shelved-year-honduran-boy-32577012
AND follows the instructions below.
----------------------------
Step 1. Search the Internet for a recently published news article
that describes a recent event that occurred in the Middle
American realm and that you can relate to geography (i.e.,
physical, cultural, political, economic). Please Note: The event
MUST have occurred during the past 90 days; the news article
also must have been published during the past 90 days.
Step 2. Summarize the event (500 - 650 words), citing
appropriate sources in APA format. Include the cited sources in
the references, also in APA format.
**Analyze the short- and long-term geographic importance of
the event within the community, region, and nation in which the
event occurred.**
**Analyze the geographic importance of the event on one or

2. more countries that are outside the realm in which the event
occurred.**
**Describe what the event reveals about culture, lifestyle,
politics, economic conditions, and values (personal, community,
or national), etc., of the people in the region or country in
which the event occurred.**
FIN 508
Assignment 7
_____________________________________________________
________________________
1
7.1. Sicily Pharmaceuticals has $10 million in debt and $70
million in equity. Its tax rate
is 30%, cost of debt 8%, and beta 1.5. The riskless rate is 5%
and the expected return on
the market 12%. Sicily would like to start a newspaper using its
existing capital. Sardinia
Times is a daily newspaper. Sardinia has $12 million in debt
and $40 million in equity,
with tax rate of 32% and beta 1.25. Find the required rate of
return for Sicily in the new
venture. 12.07% ♥
First, consider Sardinia Times, which publishes a newspaper. Its

3. unleveraged beta is
given by (11.3) as
βU(Sardinia) =
βL
1 + (1 − t) B/S
=
1.25
1 + (1 − .32)(12/40)
= 1.038205980
This gives a measure of the risk inherent in the newspaper
business. Next, releverage it
using Sicily’s financial data.
βL(Sicily) = βU [1 + (1 − t)
B
S
] = 1.038205980 [1 + (1 − 0.3)(10/70)] = 1.142026578
Use CAPM, equation (7.7) to find the cost of equity for Sicily,
ke = .05 + 1.142026578 (.12 − .05) = .1299418605
Finally, find the risk-adjusted WACC of Sicily for this venture.

4. Use (9.5),
WACC = (1 − .3)(.08)(10/80) + .1299418605 (70/80) =
.1206991279 = 12.07% ♥
7.2. Consider the financial information of Cyprus Hotels and
Corsica Inns, the two hotel
chains.
Company Debt/Assets β Cost of debt Tax rate
Cyprus Hotels 21% 1.73 10% 33%
Corsica Inns 29% ? 10% 35%
At present, the risk-free rate is 3% and the expected return on
the market 11%. Find the
weighted average cost of capital for Corsica. 14.57% ♥
First, find the debt/equity ratio for Cyprus. Since debt is 21%,
equity must be 79%.
Therefore, B/S = .21/.79 = 21/79.
Next, find the unleveraged beta of Cyprus, which represents the
risk of the hotel industry.
βU(Cyprus) =

5. βL
1 + (1 − t) B/S
=
1.73
1 + (1 − .33)(21/79)
= 1.468464596
You can use this as the unleveraged beta of Corsica. For
Corsica, debt is 29% and equity
71%, and thus B/S = 29/71. Find the leveraged β for Corsica,
FIN 508
Assignment 7
_____________________________________________________
________________________
2
βL(Corsica) = βU [1 + (1 − t)
B
S
] = 1.468464596 [1 + (1 − 0.35)(29/71)] = 1.858331605
Use CAPM, equation (7.7) to find the cost of equity for Corsica.

6. ke = .03 + 1.858331605 (.11 − .03) = .1786665284
Finally, find the WACC of Corsica.
WACC = (1 − .35)(.10)(.29) + .1786665284 (.71) =
.1457032352 = 14.57% ♥
7.3. The following table provides the financial information of
two companies in different
businesses, with the dollar amounts in millions:
Company Debt Cost of debt Equity Cost of equity Tax rate
Business
Crete Co. $33 11% $107 18% 33% Chemicals
Majorca Co. $12 9% $66 17% 29% Retail stores
At present, the risk-free rate is 4% and the expected return on
the market 12%. If Crete
Company wants to start a retail store chain as a side business,
using its existing capital,
what is the minimum acceptable rate of return on the new
venture? From your analysis,
can you deduce which is the riskier business, chemicals or retail
stores?
15.41%, chemicals ♥

7. First, look at Majorca. Its leveraged beta is given by CAPM,
equation (7.7),
.17 = .04 + βL(.12 − .04)
or βL =
.17 − .04
.12 − .04
= 1.625
Its unleveraged beta, which represents the risk of retail store
business, is given by (11.3)
as
βU =
1.625
1 + (1 − .29)(12/66)
This is also the unleveraged beta of Crete for its new retail store
venture. Leveraging it
for the parameters of Crete, we get by using (11.3),
βL = 1.439210950 [1 + (1 − .33)(33/107)] = 1.736603044

8. Use CAPM, equation (7.7), to find the cost of equity for Crete
ke = .04 + 1.736603044 (.12 − .04) = .1789282435
FIN 508
Assignment 7
_____________________________________________________
________________________
3
Next, find the WACC for Crete for this venture. The total value
of Crete is 33 + 107 =
$140 million
WACC = (1 − .33)(.11)
140
+ (.1789282435)

9. 140
= .1541244433 = 15.41% ♥
The βL for Crete as a publishing company is given by CAPM
.18 = .04 + βL(.12 − .04)
This gives βL =
.18 − .04
.12 − .04
= 1.75
The βU for Crete as a publishing company is
βU =
1.75
1 + (1 − .33)(33/107)
(chemicals)
Comparing the unleveraged betas, we find chemicals business to

10. 7.4. Rhodes Company has beta 1.55, debt/assets ratio 25%, and
tax rate 31%. The cost of
debt for Rhodes is 10%, and of equity 16%. The riskless rate is
5%. Find the WACC of
Rhodes. If its debt/assets ratio is increased to 30% while its cost
of debt remains
unchanged, what is the new WACC? Which leverage ratio is
better?
WACC(1) = 13.725%, WACC(2) = 13.681%, second is better ♥
The current WACC of Rhodes is
WACC(2) = (1 − .31)(.1)(.25) + .16 (.75) = .13725
Use CAPM to find E(Rm). Using data for Rhodes,
.16 = .05 + 1.55[E(Rm) − .05]
Solving for E(Rm), E(Rm) = (.16 − .05)/1.55 + .05 =
.1209677419
The current B/V = .25. If B = .25, then S = .75. Thus B/S =
.25/.75 = 1/3. Its unleveraged

11. beta is
βU =
βL
1 + (1 − t) B/S
=
1.55
1 + (1 − 0.31)(1/3)
= 1.260162602
The new B/V = .3. If B = .3, then S = .7. Thus B/S = 3/7.
The new leveraged beta of Rhodes is
βL = βU[1 + (1 − t) B/S] = 1.260162602 [1 + (1 − .31)(3/7)] =
1.632810686
FIN 508
Assignment 7
_____________________________________________________
________________________
4
The new cost of equity for Rhodes is

12. ke = .05 + 1.632810686 (.1209677419 − .05) = .1658768873
The new WACC of Rhodes is
WACC(2) = (1 − .31)(.1)(.3) + .1658768873 (.7) = .1368138211
Comparing, WACC(1) = .13725, WACC(2) = .13681,
7.5. Minorca Company has $125 million of bonds outstanding,
with a coupon of 6%,
selling at 95. It has 2.5 million shares of $3 preferred stock and
20 million shares of
common stock. Minorca has EBIT of $75 million this year, and
it has income tax rate of
32%. Minorca must also pay a principal payment of $10 million
to the bondholders. The
company has decided to have a dividend payout ratio of 35%.
What dividend should
Minorca declare on the common stock per share? 49.7¢ ♥
The dividend per share, DPS is given by
DPS =
[(EBIT – I)(1 – t) − SF – PD]DPR

13. N
In this case, EBIT = $75 million, I = .06*125 = $7.5 million, t =
.32, SF = $10 million,
PD = 3*2.5 = $7.5 million, DPR = .35, and N = 20 million.
Therefore,
DPS =
– 7.5)(1 – .32) – 10 – 7.5
20
(.35) = $0.497 ♥
7.6. Corfu Company expects to have $70 million in EBIT next
year, with standard
deviation $15 million. The company has $120 million in long-
term bonds with coupon
7%, and it has to pay $5 million in preferred dividends. Corfu
has dividend payout ratio
45%, and 20 million shares of common stock. The income tax
rate of the company is

14. 33%. Find the probability that the dividend next year is more
than 75¢ per share.
61.50% ♥
Suppose the company needs x in EBIT in order to pay 60¢ per
share in dividends.
Calculate the earnings after taxes for the company, using
EAT = (EBIT – I)(1 – t) – PD
Let EBIT = x, I = 7% on $120 million in debt = $8.4 million, t =
.33, and PD = $5
million. This gives
EAT = (x – 8.4)(1 − .33) – 5
Next, find the earnings per share by dividing the above quantity
by the number of shares,
20 million,
FIN 508
Assignment 7
_____________________________________________________
________________________
5

15. EPS = [(x – 8.4)(1 − .33) – 5]/20
Find the dividend per share by multiplying it by the dividend
payout ratio, .45, and equate
it to the given dividend, $0.75. This gives
DPS = [(x – 8.4)(1 − .33) – 5]/10*.45 = .75
You can solve it at WolframAlpha as follows
((x-8.4)*(1-.33)-5)/20*.45=.75
Solving for x, we have x = $65.6139 million. This is the
minimum EBIT to pay the
required dividend.
Since the company expects to make $70 million in EBIT, it is
more than 50% probable
that the company will meet its goal. Next, find
z = (65.6139 – 70)/15 = −.2924

16. Draw a normal probability curve, with z = 0 at the center. For
the minimum required
EBIT, z = −.2924, and it is somewhat to the left of center. The
area to the right of x,
which is somewhat more than 50%, will give the probability
that the company will be
able to pay the 75¢ dividend.
From the tables, we get
Probability (Div > .75) = .5 + [.1141 + .24(.1179 − .1141)] =
.6150 = 61.50% ♥
You can verify the answer by using Excel.
EXCEL =1-NORMDIST(65.6139,70,15,TRUE)
7.7. Ibiza Corporation has the following capital structure: $100
million in bonds, selling
at par with coupon 8%; 40 million shares of common stock,
priced at $20.50 each; and 1
million shares of preferred stock with an annual dividend of $4
each. Next year, the
company expects to have EBIT of $80 million out of which it
wants to keep $10 million

17. in retained earnings. The tax rate of the company is 35%. Find
the dividend that it should
declare on the common stock. What is the dividend yield of this
stock?
FIN 508
Assignment 7
_____________________________________________________
________________________
6
82¢ per share, 4% ♥
Suppose the common dividend is x per share. Using Figure 10.2,
page 177, as a guide, we
pay from EBIT, the interest, taxes, preferred dividends, and
common dividends, in that
order, to arrive at the retained earnings. We write this as an
equation,
(80 − .08*100)(1 − .35) – 1*4 − 40x = 10
The above equation is set up as follows.
(80 − .08*100) (1 − .35) − 4 − 40x = 10

18. EBIT − interest − taxes − preferred
dividends
− common
dividends
= retained
earnings
Use WolframAlpha, to solve the equation
(80-.08*100)*(1-.35)-4-40*x=10
The answer is x = .82, or 82¢ per share ♥
The dividend yield of a stock is dividend per share divided by
the price per share. In this
case it is .82/20.5 = .04 = 4% ♥
7.8. Malta Company follows the residual theory of dividends. It
has 5 million shares of
common stock, and it maintains its optimal debt/assets ratio at
35%. Its EBIT next year is
expected to be $15 million, with a standard deviation of $5
million. The income tax rate
of Malta is 30% and it has to pay $2 million in interest. It
would like to finance $10

19. million in new projects from retained earnings and new
borrowings. Find the probability
that it will be able to give a dividend of at least 80¢ next year.
34.46% ♥
To follow the residual theory of dividends, the company (a)
identifies profitable projects,
(b) finances them while (c) maintaining an optimal capital
structure. It has $10 million in
new projects, which should be financed with 35% debt and 65%
in equity. It needs
.35*10 = $3.5 million in new debt, acquired by selling new
bonds.
The remaining .65*10 = $6.5 million is equity. To have this
money in retained earnings,
the company should have at least x in EBIT. Since the company
has to pay $2 million in
interest and 30% in taxes, the after-taxes earnings from this
EBIT are
EAT = (x − 2)(1 − .3)
Out of this EAT, the company pays .8*5 = $4 million in

20. dividends and has $6.5 million
in retained earnings. Thus
(x − 2)(1 − .3) − 4 = 6.5
FIN 508
Assignment 7
_____________________________________________________
________________________
7
Solving for x, we get x = (6.5 + 4)/(1 − .3) + 2 = $17
million
The company should have $17 million in EBIT to pay a
dividend of $0.80 per share.
Since the company expects to have only $15 million in EBIT,
the probability of an 80¢
dividend is somewhat less than 50%. Next, find z = (17 − 15)/5
= .4.
Draw a normal probability curve, with z = 0 at the center. For
the required EBIT, z = .4 is
somewhat to the right of center. The area further to the right of
that point gives the

21. required probability. Check the tables to find the probability as
P(DPS > $0.80) = .5 – .1554 = .3446 = 34.46% ♥
To verify the answer at Excel, use the following
EXCEL =1-NORMDIST(17,15,5,TRUE)
FIN 508
Assignment Week 6
_____________________________________________________
________________________
1
6.1. Kerry Corporation needs $30 million in new capital, which
it may acquire by selling
bonds at par with 6% coupon or by selling stock at $40 (net) per
share. The current
capital structure of Kerry consists of $250 million (face value)
of 3% coupon bonds
selling at 80, and 12 million shares of stock selling at $42
apiece. After the new financing,

22. the EBIT of Kerry is expected to be $50 million with a standard
deviation of $20 million.
The income tax rate of Kerry is 33%. Which method of
financing do you recommend?
What is the probability that you are right? [Use bonds, 72.41%
♥]
First, determine the critical EBIT, where the debt financing and
equity financing provide
equal EPS, by using
E* = I + r(NP + F) (10.7)
In this equation, I = interest on existing debt = .03(250) = $7.5
million
r = coupon rate on new debt = .06
N = number of shares of stock at present = 12 million
P = price per share of new equity = $40
F = amount of new financing needed = $30 million
E* = 7.5 + .06*(12*40 + 30) = $38.1 million
Since the company expects to make $50 million in EBIT, which
is more than E*, it is

23. better to sell bonds. ♥
To find the probability that you have made the right decision,
find z as
z = (38.1 – 50)/20 = −0.595
Draw the normal probability distribution curve, with z = 0 in
the middle. The required z =
−.595 is to the left of center. The area on the right of z = −.595
represents the probability
of making the right decision. From the tables, we get the
probability of being right
P(being right) = .5 + .2224 + .5(.2257 − .2224) = 72.41% ♥
To check the answer at Excel, copy and paste the following in
any cell.
EXCEL =1-NORMDIST(38.1,50,20,TRUE)
6.2. Clinton Company is expecting to have EBIT next year of
$15 million, with a
standard deviation of $10 million. Clinton has $60 million in
bonds with 5% coupon,
selling at par. Clinton is retiring $6 million (face amount) of

24. bonds annually. Clinton also
has 100,000 shares of preferred stock, which pays annual
dividend of $3.50 per share.
The tax rate of Clinton is 32%. Calculate the probability that
Clinton will not be able to
pay interest, sinking fund, and preferred dividends, out of its
current income, next year.
[39.51% ♥]
Suppose Clinton’s EBIT next year is just sufficient to pay its
interest, taxes, sinking fund
and preferred dividends. To do so, minimum EBIT must be
FIN 508
Assignment Week 6
_____________________________________________________
________________________
2
(EBIT – I)(1 – t) – SF – PD = 0
In this equation, interest due, I = .05*60 = $3 million, income
tax rate, t = .32, sinking
fund = $6 million, preferred dividends = 3.5*100,000 =

25. $350,000 = $0.35 million. This
gives
(EBIT – 3)(1 – .32) – 6 – .35 = 0
Solving for EBIT, we get EBIT = $12.33823529 million.
Since the company expects to have EBIT of $15 million, it
should be able to make it. The
probability of not being able to pay the interest is less than
50%. To find this probability,
calc
Draw a probability diagram with z = 0 in the center, and z =
−.2661 to the left of center.
The area to the left of z = −.2661, the area under the tail of the
curve, gives the required
probability. Using tables, we get
Prob(unable to pay) = .5 – [.1026 + .61(.1064 – .1026)] = .4244
The probability of default is thus 39.51% ♥
To verify the result, use the following expression in Excel:

26. EXCEL =NORMDIST(12.33823529,15,10,TRUE)
6.3. Rice Corporation has the following information for the
current year.
Cost of debt 6%
Debt-to-equity ratio 30%
Dividend payout ratio 40%
Dividend per share $1.50
Income tax rate 32%
Long-term debt $30 million
Number of common shares 10 million
Find the EBIT and the price per share for Rice. [$56.947
million, $10.00 ♥]
Combine EPS =
(EBIT − I) (1 − t) − SF − PD
N
(10.3)
and DPS = EPS * DPR

27. to get DPS =
(EBIT − I) (1 − t) − SF − PD
N
* DPR
FIN 508
Assignment Week 6
_____________________________________________________
________________________
3
Put DPS = $1.50, I = .06*30 = $1.8 billion, t = .32, SF = PD =
0, N = 10 million, DPR
= .4,
to get 1.5 =
(EBIT − 1.8) (1 − .32) − 0 − 0
10
* .4
which gives EBIT =
1.5(10)
.4(1 − .32)
+ 1.8 = $56.947 million ♥

28. Since debt to equity ratio is .3, therefore, B/S = .3
With B = $30 million, it gives 30/S = .3. Or, S = 30/.3 = $100
million
Because N = 10 million, the price per share = $10 ♥
6.4. Powell Corporation has 5 million shares of common stock
selling at $21 each. It has
$25 million in bonds with 5% coupon, selling at par. Powell
Corporation needs $20
million in new capital, which it can raise by selling stock at $20
per share, or bonds at 6%
interest. The expected EBIT after the new capitalization is $6
million, with a standard
deviation of $5 million. The income tax rate of Powell is 35%.
What is the preferred
method of raising new capital? What is the probability that you
are right? [Answer not
given ♥]
Since SF = PD = 0, E* = I + r (N P + F)
(10.7)

29. Put I = .05*25 = $1.25 million, r = .06, N = 5 million, P = $20,
and F = $20 million. This
gives the critical EBIT as
E* = 1.25 + .06 (5*20 + 20) = 7.85 = $8.45 million
Since the expected EBIT, $6 million is less than the critical
EBIT, $8.45 million, it is
better to sell stock to get new financing. ♥
To find the probability of being right, calculate z = (8.45 – 6)/5
= .49
Draw a normal probability distribution diagram with z = 0 in the
center and z = .49 to the
right of center. The critical EBIT will be about one-third
standard deviation on the right
of the center. The area to the left of z = .49 point will represent
the probability that the
FIN 508
Assignment Week 6
_____________________________________________________
________________________

30. 4
company will make less than the critical EBIT. This represents
the probability of being
right in this decision. From the tables, get
P(EBIT < $8.45 million) = .5 + .1879 = 68.79%. ♥
To verify the result on Excel, use this expression
EXCEL =NORMDIST(8.45,6,5,TRUE)
6.5. Albright Company is an all-equity firm with a total value of
$51 million. It requires
additional capital of $6 million, which may be either equity, or
debt at the interest rate of
5%. After the new capitalization, the expected EBIT is $2
million, with standard
deviation of $1 million. The company pays income tax at 30%
rate, and it has 1.7 million
shares outstanding. What is the expected earnings per share for
(A) bond financing and
(B) stock financing? What is the preferred method of raising
new capital, if the objective
is to maximize the EPS? What is the probability that you are

31. right in your decision?
[EPS(bonds) = $0.7000, EPS(stock) = $0.7368, Use stock,
80.23% ♥]
The company is an all-equity firm, meaning it has no debt. The
total value of the
company is $51 million, which is due to 1.7 million shares of
stock. The price per share
of stock is thus, 51/1.7 = $30. Further, we know EBIT = $2
million, I = 0, r = .05. F = $6
million, N = 1.7 million, t = .3, and SF = PD = 0. To find the
earnings per share for bond
and stock financing, use
EPS(bonds) =
(EBIT − I − r F) (1 − t) − SF − PD
N
(10.4)
Find the EPS(bonds) =
(2 − 0 − .05*6) (1 − .3) − 0 − 0
1.7
= $0.70 ♥
Use EPS(stock) =
(EBIT − I) (1 − t) − SF − PD

32. N + F/P
(10.5)
Find the EPS(stock) =
(2 − 0) (1 − .3) − 0 − 0
1.7 + 6/30
= $0.7368 ♥
Comparing $0.70 with $0.7368, obviously stock financing is
better. ♥
Next, find the critical EBIT. It comes as
Since SF = PD = 0, E* = I + r (N P + F)
(10.7)
This gives E* = 0 + .05 (1.7*30 + 6) = $2.85
million
This confirms that stock financing is better because the
expected EBIT, $2 2illion, is
much less than the critical EBIT, $2.85 million.
To find the probability of being right, calculate z = (2.85 – 2)/1
= .85

33. FIN 508
Assignment Week 6
_____________________________________________________
________________________
5
Draw a probability distribution curve, with z = 0 in the center.
The critical EBIT, E*, will
be .85 standard deviations on the right of center. The area under
the hump of the curve, to
the left of E*, will give the desired answer. From the tables,
find
P(Being right) = .5 + .3023 = .80.23 = 80.23% ♥
You may verify the above result by using the following
expression at Excel:
EXCEL =NORMDIST(2.85,2,1,TRUE)
6.6. Baker Company has debt-to-assets ratio of 40%, tax rate of
33%, and total value of
$300 million. James Baker, the CFO, would like to increase the
leverage ratio to 42%,
and he believes that there will be no change in the bankruptcy
cost of the company. How

34. many dollars’ worth of 4% coupon bonds should the company
sell, and buy back its own
stock, to accomplish the financial restructuring? [$6.965 million
♥]
Before: B1/V1 = .4, total value, V1 = $300 million, total debt,
B1 = .4*300 = $120 million.
After: B2/V2 = .42
Suppose the company issues x million dollars (face amount) of
bonds and buys back its
own stock from the proceeds. This adds value by tax shield =
tB, and increases the debt
by x. Thus
V2 = 300 + .33x
B2 = 120 + x
Thus
B2
V2
=
120 + x

35. 300 + .33x
= .42
To solve this equation at Wolfram|Alpha, type the following
instruction
solve((120+x)/(300+.33*x)=.42)
Solving for x, we get x = $6.9654 million ♥
http://www.wolframalpha.com/
FIN 508
Assignment Week 6
_____________________________________________________
________________________
6
6.7. Schultz Company plans to buy back 1.5 million shares of
its own stock from its cash
reserves at $20 a share. This will increase the bankruptcy costs
by $5 million, and the
debt/assets ratio from 20% to 22%. Using careful reasoning, do
the following:
(A) Write two equations representing debt/assets ratio of the
company, before and after

36. the capital restructuring. Solve them to find the debt and total
value of the company
before and after the share buyback.
(B) The total equity and the number of shares of stock before
and after the buyback.
(C) The price per share before and after the buyback. Did the
company make a wise
move? [No, because the price of the stock fell from $20 to
$19.64 per share. ♥]
(A) The company buys 1.5 million shares at $20 per share and
pays out 1.5(20) = $30
million from its cash reserves. Thus, the value of company will
go down by $30 million.
The value of the company will further decrease by $5 million
because of the increase in
bankruptcy costs. The net total loss in value will be $35
million. If the initial value of
company is V1, its final value is V2 = V1 – 35. There is no
change in the initial debt, B1, of
the company.
Thus, Before: B1/V1 = .2, and After: B1/(V1

37. – 35) = .22
To solve these equations at Wolfram|Alpha, type in
solve(B1/V1=.2,B1/(V1-35)=.22)
Solving these equations, we find B1 = $77 million and V1 =
$385 million. These are the
values before share buyback.
After the share repurchase, the value of debt remains the same,
$77 million, but the value
of the company is down by $35 million. Thus it is 385 − 35 =
$350 million. The values of
debt and total value are B2 = $77 million and V2 = $350
million. ♥
(B) Initially, the company had $385 million in total value, of
which $77 million was debt.
The value of stock was S1 = 385 − 77 = $308 million. Since the
stock was selling at $20 a
share, it had 308/20 = 15.4 million shares. This means N1 =
15.4 million
Finally, the company had $350 million in total value, of which

38. $77 million was debt. The
value of stock was S2 = 350 − 77 = $273 million. Since the
company bought back 1.5
million shares, the remaining shares were 15.4 − 1.5 = 13.9
million shares, or N2 = 13.9
million. ♥
(C) The price per share before buyback is S1/N1 = 308/15.4 =
$20. After buyback, S2/N2 =
273/13.9 = $19.64. Thus P1 = $20, P2 = $19.64 ♥
http://www.wolframalpha.com/
FIN 508
Assignment Week 6
_____________________________________________________
________________________
7
The company has made a mistake. First, it lost $30 million from
its cash reserves for no
good reason. Second, by eroding the equity base, it has
increased the possibility of
bankruptcy. The mistake is reflected in the lower value of the

39. stock. ♥
6.8. Kissinger Company has debt/assets ratio 30%, which is too
high and it should be at
25% to be optimal. This debt reduction should also reduce the
bankruptcy costs by $25
million. At present, Kissinger has 20 million shares of common
stock selling at $40 each.
The tax rate of Kissinger is 32%. How many shares of stock
should the company sell, and
buy back bonds from the proceeds, to attain its optimal capital
structure? [1,382,958 ♥]
The debt/assets ratio is 30% at present, which means that equity
is 70% of the value of
the company. Find the value of equity as 20*40 = $800 million.
If the total value of the
company is V1, then .7V1 = 800. This gives V1 = 800/.7 = $
1,142.857 million. The value
of stock is $800 million. The value of debt is 1,142.857 – 800 =
$342.857 million. Using
symbols, we write the results as
Before: B1 = $342.857 million, S1 = $800 million, V1 =
$1,142.857 million

40. Suppose the number of shares that Kissinger should sell is x
million, at $40 each. This
will give it $40x million in new cash. The company will use this
money to pay off its debt.
The debt will decrease by $40x million.
After: B2 = 342.857 – 40x
(1)
There are two changes in the total value of the company: it will
decrease due to lower tax
shield, but it will increase due to lower bankruptcy costs.
Since the debt has decreased by $40x million, there is a
corresponding decrease in tax
shield by $.32(40x) million, where .32 or 32% is the income tax
rate of the company.
This will decrease the overall value of the company by .32(40x)
= 12.8x million.
Since the bankruptcy costs have gone down by $25 million, the
overall value of the
company will increase by $25 million. Therefore, final value
will become,

41. After V2 = 1,142.857 – 12.8x + 25
(2)
We know that the new debt/assets ratio of the company is .25.
Combining (1) and (2),
B2
V2
=
342.857 – 40x
1142.857 – 12.8x + 25
= .25
To solve the equation at Wolfram|Alpha, type as follows.
(342.857-40*x)/(1142.857-12.8*x+25)=.25
Solving this equation for x, we get
http://www.wolframalpha.com/
FIN 508
Assignment Week 5

42. _____________________________________________________
________________________
1
5.1. Ontario Corporation may raise new capital in one of the
following three ways. It has
tax rate of 35%. Find the after-tax cost of new capital.
(A) It can sell common stock at $27 a share, which will pay a
dividend of $2.25 next year.
The expected rate of growth of dividends is 5% per annum
forever.
Use Gordon's growth model, P0 =
D1
R − g
(3.6)
27 =
2.25
R − .05
, R = ke = 2.25/27 + .05 = .1333 = 13.33% ♥
(B) It can sell 8.5% bonds at $850 each, which will mature in 10
years. Assume that the
bonds pay interest twice a year and the company pays taxes

43. once a year.
Find the cost of debt by calculating the yield to maturity of the
bonds.
850 + (1000 – 850)/10
925
= .1081
After-tax cost of debt = (1 − .35)(.1081) = 7.027% ♥
Include the original issue discount and set up the equation as
i=1
20
42.5
(1 + r/2)
i=1
10

44. (85 + 15)(.35)
(1 + r)
i −
1000
(1 + r)
10 = 0
PV of
sale
PV of interest
payments
PV of tax
benefits
PV of final
payment
To do it at WolframAlpha, send the following instruction.
850-sum(42.5/(1+r/2)^i,i=1..20)+sum(100*.35/(1+r)^i,i=1..10)-
1000/(1+r)^10=0
The result is , or about 7.264% ♥

45. (C) By selling $7 preferred stock at $60 a share, redeemable at
par after 5 years.
A preferred stock is similar to the ordinary stock, except that its
dividend remains
constant. That is, its growth potential g is zero. Use Gordon’s
growth model again to see
kp = 7/60 = .1167 = 11.67% ♥
There is no tax benefit in issuing the preferred stock.
http://www.wolframalpha.com/
FIN 508
Assignment Week 5
_____________________________________________________
________________________
2
5.2. Quebec Company wants to issue discount bonds with a
market value equal to 70% of
their face value. The bonds will carry 4% coupon, paying
interest semiannually, and they

46. will mature after 15 years. The income tax rate of Quebec is
25%.
(A) Calculate the approximate yield-to-maturity of the bonds,
and then the after-tax cost
of debt for Quebec.
40 + (1000 – 700)/15
850
= .07059 = 7.059% ♥
After-
(B) Using the concept of original issue discount, write an
equation that would give the
after-tax cost of debt for Quebec. Solve this equation by using
WolframAlpha, Maple, or
Excel to find the after-tax cost of debt for Quebec.
The company issues the bonds for 70% of face value, or $700
each but redeems for
$1000 each. The difference, $300, is the original issue discount.
This is the cost to the
company and it can spread it over 15 years, which gives it an
additional tax deduction of

47. 300/15 = $20 per year. The company pays $40 annually in
interest, or $20 semiannually.
From the company’s perspective, the present value of all after-
tax cash flows from the
bond, positive and negative, should be equal to zero. Thus
i=1
30
20
(1 + r/2)
i=1
15
(40 + 300/15)(.25)
(1 + r)
i −
1000
(1 + r)
10 = 0

48. The unknown r will be the after-tax cost of debt for the
company. To solve it at
WolframAlpha, send the following instruction.
700-
sum(20/(1+r/2)^i,i=1..30)+sum((40+300/15)*.25/(1+r)^i,i=1..15
)-1000/(1+r)^15=0
If you click on more roots several times, it eventually gives the
answer. The result is
, or 5.529% ♥
You can use the following Excel table to find the after-tax cost
of debt. Adjust the
number in cell B1 until the value in B9 becomes very small.
A B
1 After-tax cost of debt = .055294
2 Sale price of the bond = $ 700
3 Time to maturity = years 15
4 Coupon rate = % 4%
5 Income tax rate = % 25%

49. 6 PV of interest payments = =-B4*1000*(1-
1/(1+B1/2)^(2*B3))/B1
7 PV of tax benefits = =(B4*1000+(1000-B2)/B3)*B5*(1-
1/(1+B1)^B3)/B1
8 PV of final payment = =-1000/(1+B1)^B3
9 NPV of bond = 0 =B2+B6+B7+B8
http://www.wolframalpha.com/
FIN 508
Assignment Week 5
_____________________________________________________
________________________
3
5.3. Nova Scotia Company has the following capital structure:
4.5 million shares of
stock, selling at $25 each, with β = 1.1; zero-coupon bonds with
face amount $60 million,
maturing in 10 years, with yield to maturity 7.5%; and 500,000
shares of preferred stock
selling at $12 per share, paying a dividend of 30¢ per quarter.
The income tax rate of
Nova Scotia is 33%. The risk-free rate is 4%, and the expected
return on the market 13%.

50. Do not use the original issue discount. Find the weighted
average cost of capital for Nova
Scotia.
Total market value of stock, S = 4.5*25 = $112.5 million
Suppose the current value of the bonds is $B million. Growing
in value at the rate of
7.5% per year, they will reach their face value, $60 million, in
ten years. Thus
60 = B(1.075)
10
Solve for B, B = 60/1.075
10
= $29.11163570 million. This is the present value of debt.
The value of preferred stock, P is .5*12 = $6 million
The total value of the company, V = 112.5 + 29.11163570 + 6 =
$147.612 million
Cost of debt = YTM = .075

51. Cost of equity = ke = r + β[E(Rm) – r] = .04 + 1.1(.13 − .04) =
.139
Cost of preferred stock, kp = D1/P0 = 1.20/12 = .1
Use the equation
WACC = (1 − t) kd
B
V
+ ke
S
V
+ kp
P
V
to get
WACC = (1 − .33)(.075)

52. 147.612
+ (.139)
147.612
+ (.1)
147.612
= .1199 = 11.99%♥

53. FIN 508
Assignment Week 5
_____________________________________________________
________________________
4
5.4. New Brunswick Corporation has 35% debt and 65% equity
(market values) in its
capital structure. The pretax cost of debt is 9%, and that of
equity 14%. The total value of
the company is $225 million and its income tax rate is 30%.
New Brunswick has to raise
$25 million in new capital, which will make the expected EBIT
of the company to be $20
million, with a standard deviation of $10 million. The company
has decided to raise the
new capital half with debt and half with equity at the existing
rates. Calculate New
Brunswick's new WACC, and the probability that its interest
coverage ratio will be less
than one.

54. Before new financing,
35% debt means B/V = .35, and thus S/V = .65
Cost of debt, kd = .09
Cost of equity ke = .14
Total value of the company, V = $225 million
Income tax rate, t = .3
Market value of debt, B = .35(225) = $78.75 million, and
equity, S = .65(225) = $146.25
million
The company will raise $25 million in new capital, with $12.5
million each from debt
and equity. After new financing,
B = 78.75 + 12.5 = $91.25 million
S = 146.25 + 12.5 = $158.75 million
V = 225 + 25 = $250 million
Use the equation
WACC = (1 − t) kd
B

55. V
+ ke
S
V
to get
WACC = (1 − .3)(.09)(91.25)/250 + .14(158.75)/250 = .111895
= 11.19% ♥
Total interest due = .09(91.25) = $8.2125 million. By definition,
Interest coverage ratio =
Earnings before interest and taxes (EBIT)
Interest due
The interest coverage ratio is less than 1 if EBIT is less than
$8.2125 million. The
expected EBIT of the company is $20 million, so it can easily
pay $8.2125 million in
interest. The probability of default is quite small. To get a
numerical answer, first find

56. z = (8.2125 − 20)/10 = − 1.17875.
Draw a normal probability curve, with z = 0 at the center. The
point z = − 1.17875 will
appear well to the left of the center. The required probability is
the small area under the
tail of the curve.
FIN 508
Assignment Week 5
_____________________________________________________
________________________
5
To find the yellow area, check the tables,
P(ICR < 1) = .5 − (.3790 + .875*(.3810 − .3790)) = .11925 =
11.925% ♥
You can verify the result by using the following instruction at
Excel.
EXCEL =NORMDIST(8.2125,20,10,TRUE)

57. 5.5. Manitoba Corporation stockholders expect a growth rate of
5% in the company, and
a dividend of $2.00 next year. The WACC of Manitoba is
11.5%. There are 4 million
shares of the common stock, selling at $20 per share. The
company also has $70 million
face value zero-coupon bonds, which will be due after 8 years.
The bondholders have a
required rate of return of 7%. Find the tax rate of Manitoba.
This problem is slightly different because the income-tax rate is
unknown. We can
arrange the information in the following way:
Number of shares of common stock, given, N = 4 million
Price per share of common stock, given, P0 = $20
Total value of equity, S = NP0 = 4(20) = $80 million
Dividend per share of common stock next year, D1 = $2
Growth rate of dividends, given, g = .05
Using Gordon’s growth model, cost of equity, ke = D1/P0 + g =
2/20 + .05 = .15
Face value of the bonds, given, F = $70 million

58. Number of years to maturity, given, T = 8 years
Required rate return by bondholders = Discount rate of the
bonds = .07
Present value of bonds, B = F/(1 + r)
T
= 70/1.07
8
Required rate return by bondholders, given = Cost of debt, kd =
.07
$120.74 million
Since WACC is given as 11.5%, we can write equation (9.5) as
FIN 508
Assignment Week 5
_____________________________________________________
________________________
6
.115 = (1 − t)(.07)

59. 120.74
+ (.15)
120.74
To solve the equation, go the WolframAlpha and insert the
following
.115=(1-t)*.07*40.74/120.74+.15*80/120.74
The result is , or 33.90% ♥
5.6. British Columbia Co has the following capital structure. It
has 12 million shares of
common stock selling for $20 each. The stock will pay a

60. dividend of $2 next year and
this dividend is expected to grow at the rate of 5% annually.
British Columbia has just
raised $120 million by selling 10% coupon bonds at par. British
Columbia also has 10
million shares of preferred stock, which pays a dividend of
$1.50 annually, and the
preferred shareholders have a required rate of return of 12%.
British Columbia has 33%
income tax rate. Find the WACC of British Columbia.
Number of shares of common stock, given, N = 12 million
Price per share of common stock, given, P0 = $20
Total value of common stock, S = NP0 = 12(20) = $240 million
Dividend per share next year, given, D1 = $2
Dividend growth rate, given, g = .05
Cost of equity from Gordon’s growth model, ke = D1/P0 + g =
2/20 + .05 = .15
Total value of bonds, given, B = $120 million
Cost of debt, given, kd = .1

61. Dividend of preferred stock, per share, given, Dp = $1.50
Cost of capital for preferred stock, given, kp = .12
Price per share of preferred stock, from Gordon’s growth model,
zero growth,
Pp = Dp/kp = 1.5/.12 = $12.50
Number of shares of preferred stock, given, Np = 10 million
Total value of preferred stock, P = NpPp = 10,000,000*12.5 =
$125 million
Total value of company, V = 240 + 120 +125 = $485 million
Putting all these numbers (9.2), we find
WACC = (1 − .33)(.1)
485
+ (.15)

62. 485
+ (.12)
485
= 12.17% ♥
http://www.wolframalpha.com/
FIN 508
Assignment Week 5
_____________________________________________________
________________________
7
5.7. Prince Edward Island Corporation has the following capital
structure: $60 million

63. (face value) of 8% bonds, which are selling at 95 and maturing
after 10 years; 10 million
shares of common stock selling at $10 each; and one million
shares of preferred stock
selling at $10 each and paying an annual dividend of $1.25. The
β of the stock is 1.63
whereas the expected return on the market is 12%. The risk-free
rate is 4% and the
company's tax rate is 32%. Find the WACC of Prince Edward
Island.
Number of shares of common stock, given, N = 10 million
Price per share of common stock, given, P0 = $10
Market value of stock, NP0 = 10*10 = $100 million
Given β = 1.63, r = .04, and E(Rm) = .12, we find the cost of
equity as
ke = .04 + 1.63(.12 − .04) = .1704
Face value of the bonds, given, F = $60 million
Bonds sell at 95, meaning 95% of their face value, given
Market value of debt = .95F = .95(60) = $57 million

64. Cost of debt = YTM =
80 + (1000 – 950)/10
975
= .08718
Number of shares of preferred stock, given = 1 million
Price per share of preferred stock, given, Pp = $10
Market value of preferred stock = 1*10 = $10 million
Dividend per share of preferred stock, given, Dp = $1.25
Cost of preferred stock (Gordon’s growth model, no growth) =
Dp/Pp = 1.25/10 = .125
Total value of the company = 100 + 57 + 10 = $167 million
Income tax rate = .32
Thus
WACC = (1 – .32)(.08718)(57/167) + .1704(100/167) +
.125(10/167) = .1298 ♥

65. FIN 508
Assignment Week 5
_____________________________________________________
________________________
8
5.8. Saskatchewan Corporation has debt/assets ratio of .3, its
cost of debt is 8% and that
of equity 13%. The tax rate of Saskatchewan is 30%. The
company is not growing and it
has a dividend payout ratio of 100%. Its dividend per share is
$2. Saskatchewan has 2
million shares of common stock. Find the total value of
Saskatchewan, and its WACC.
First, find price per share by using Gordon’s growth model.
Cost of equity (given), ke = R = .13
Growth rate of the company and its dividends (given), g = 0
The dividend per share next year (given), D1 = $2

66. Thus, current price by Gordon’s growth model,
P0 = D1/(R − g) = 2/(.13 − 0) = $15.38 per share
Number of shares of stock (given), N = 2 million
Total value of stock, S = NP0 = 2*15.38 = $30.77 million,
Debt-to-Assets ratio (given), B/V = .3
Which gives, (V − S)/V = .3, or (V − 30.77)/V = .3
Or, V − 30.77 = .3 V, or (1 − .3)V = 30.77, or V =
30.77/.7
Or, V = $43.96 million ♥
The value of debt, B = V − S = 43.96 − 30.77 = $13.19 million
Cost of debt (given), kd = .08
WACC = (1 − .3)(.08)
43.96
+ .13

67. 43.96
= .1078 = 10.78% ♥