After–tax cost of debt = 10.4%(1 – 0.32) = 7.072%
Theresa: Condo value increase: 0.10(100,000) = $10,000
(b) Stan: Stock value decrease: -0.10(20,000) = $-2000
(c) Under high leverage situations, the gain or loss is multiplied by the leverage factor. If
Multiple, Non–economic Attributes
10.44 (a) Wi = 1/6 = 0.1667
10.45 Σsi = 40 + 60 + 70 + 30 + 50
= 250
10.46 (a) S = 1 + 2 + 3 +… + 10
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= n(n+1)/2
= 10(11)/2
= 55
(b) WD = 4/55 = 0.073
10.47 Ratings by attribute with 10 for #1
Attribute, i Importance, Si Logic________
27.5
Attribute, i Wi
1.000
10.48 Ratings by attribute with 100 for most important.
Attribute Importance
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3 3
4 6
5 10
6 4.8
33.8
Wi = Score/33.8
Attribute Wi______
10.49 (a) Calculate Wi = importance score/sum and solve for Rj
Inspector
Attribute, Importance Rj = Wj×Vij___
Select alternative 1 since R1 = 95 is largest.
Manager
Attribute, Importance _Rj = Wj×Vij___
(b) Results are the same, even though the Inspector and Manager rated opposite on
10.50 (a) Calculate Rj using manager scores.
Wi = Importance score
Sum
Attribute, Importance Rj_______
i by Manager Wi A B__
Select proposal A
(b) Calculate Rj using the team supervisor scores.
Attribute, Importance Rj______
Either proposal is acceptable
Spreadsheet Exercises
10.52 (a) Project i* = 9.012% for the 50-50 D-E mix, where $5,000,000 in equity is required.
(b) Project i* values on equity basis are shown in columns F and K. The results are the
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10.53 Two independent, revenue projects with different lives. Find AW at MARR, select all
with AW > 0. Find WACC first.
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10.54 (a) The spreadsheet shows that A is selected from the manager’s scores (RA = 0.771) and
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Additional Problems and FE Exam Review Questions
10.55 Answer is (d)
Answer is (c)
10.57 % debt = 15/(6 + 3.5 + 15)
% equity = (6 + 3.5)/(6 + 3.5 + 15)
10.58 Answer is (b)
10.61 Historical WACC = 0.5(11%) + 0.5(9%) = 10%
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10.64 Sum of scores = 100 + 75 + 50
= 225
Weight = 50/225
= 0.222
Answer is (c)
10.65 R = 0.4(3) + 0.3(7) + 0.2(2) + 0.1(10)
10.66 S = 1 + 2 + 3 +… + 10 = 10(11)/2 = 55
Solution to Case Study, Chapter 10
There is not always a definitive answer to case study exercises. Here are example responses
EXPANDING A BUSINESS — DEBT OR EQUITY FINANCING?
1. Set MARR = WACC
2. A: 50–50 D–E financing
Use relations in case study statement and the results from Question #1.
B: 0–100 D–E financing
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Now 6.61% < WACCB = 8.33%, plan B is rejected.
Recommendation: Select plan A with 50-50 financing.
3. Spreadsheet shows the hard way (develops debt-related cash flows for each year) and the easy
way (uses costs of capital from #1) to plot WACC. It is shaped differently than the WACC
curve in Figure 10-2.