Chapter 15
SOLUTIONS TO END-OF-CHAPTER PROBLEMS
15-9
a. Present situation (50% debt):
WACC = wd rd(1-T) + wcers
= (0.5)(10%)(1-0.15) + (0.5)(14%) = 11.25%.
V=
FCF
( EBIT )(1  T) ($13.24)(1  0.15)
= $100 million.


WACC
WACC
0.1125
70 percent debt:
WACC = wd rd(1-T) + wcers
= (0.7)(12%)(1-0.15) + (0.3)(16%) = 11.94%.
V=
FCF
( EBIT )(1  T) ($13.24)(1  0.15)
= $94.255 million.


WACC
WACC
0.1194
30 percent debt:
WACC = wd rd(1-T) + wcers
= (0.3)(8%)(1-0.15) + (0.7)(13%) = 11.14%.
V=
FCF
( EBIT )(1  T) ($13.24)(1  0.15)
= $101.023 million.


WACC
WACC
0.1114
15-10 a. BEA’s unlevered beta is bU=b/(1+ (1-T)(D/S))=1.0/(1+(1-0.40)(20/80)) = 0.870.
b. b = bU (1 + (1-T)(D/S)).
At 40 percent debt: bL = 0.87 (1 + 0.6(40%/60%)) = 1.218.
rS = 6 + 1.218(4) = 10.872%
c. WACC = wd rd(1-T) + wcers
= (0.4)(9%)(1-0.4) + (0.6)(10.872%) = 8.683%.
V=
FCF
( EBIT )(1  T) ($14.933)(1  0.4)
= $103.188 million.


WACC
WACC
0.08683
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted
to a publicly accessible website, in whole or in part.
Mini Case: 15 - 1
15-11 Tax rate = 40%
bU = 0.8
rRF = 5.0%
rM – rRF = 6.0%
From data given in the problem and table we can develop the following table:
Levered
wd
wce
D/S
rd
rd(1 – T)
betaa
rsb
WACCc
0
0.2
0.4
0.6
0.8
100%
80%
60%
40%
20%
0.00
0.25
0.67
1.50
4.00
6.0%
7.0%
8.0%
9.0%
10.0%
3.60%
4.20%
4.80%
5.40%
6.00%
0.80
0.92
1.12
1.52
2.72
9.80%
10.52%
11.72%
14.12%
21.32%
9.80%
9.26%
8.95%
8.89%
9.06%
Notes:
a
These beta estimates were calculated using the Hamada equation,
b = bU[1 + (1 – T)(D/S)].
b
These rs estimates were calculated using the CAPM, rs = rRF + (rM – rRF)b.
c
These WACC estimates were calculated with the following equation:
WACC = wd(rd)(1 – T) + (wce)(rs).
The firm’s optimal capital structure is that capital structure which minimizes the firm’s
WACC. The WACC is minimized at a capital structure consisting of 60% debt and 40%
equity. At that capital structure, the firm’s WACC is 8.89%.
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted
to a publicly accessible website, in whole or in part.
Mini Case: 15 - 2