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1. D
2. D
3. C
4. B
5. A
6. B
7. D
8. D
9. C
10. C
PROBLEM SOLVING:
PROBLEM A.
1. A table should be made to show the cursory computation of the mean:
A B C D
Structure Price per share Probability Mean
1 P5.20 15% 0.78
2 P5.25 30% 1.575
3 P5.30 45% 2.385
4 P5.35 10% 0.535
Overall Mean 5.275
E F G H
Price per Deviation Deviation Sq. Deviation
share Squared x Probability
E Mean F2 GxC
P5.20 -0.075 0.005625 0.00084375
P5.25 -0.025 0.000625 0.0001875
P5.30 0.025 0.000625 0.00028125
P5.35 0.075 0.005625 0.0005625
Variance 0.001875
Standard 0.0433
Deviation
(Square Root
of Variance)
PROBLEM B.
2. Unlevered Beta
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4. New Cost of Equity using New Beta of 1.67 (at equity portion of 50%)
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PROBLEM C.
To determine the optimal capital structure, the stock price (P0) must be computed. The
capital structure with the highest stock price is the optimal capital structure.
P0 =
1. What is the price of the stock if the firm is unlevered? 56.25
2. What is the price of the stock for each level of debt? (Refer to table above)
3. What is the debt ratio at the optimal capital structure? 0%
4. What is the equity ratio at the optimal capital structure? 100%
PROBEM D.
This problem uses a trial-and-error method to determine which capital structure shows
the lowest WACC.
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New (Levered) Beta (at debt-to-equity ratio of 20%:80%)
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( )( )
( )( )
( )( )
( )( )
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In determining the Optimal Capital Structure, the following are the determinants:
In this problem, WACC shall be computed in order to determine the Optimal Capital Structure.
PROFITABILITY RATIOS:
ROA =
ROE =
( )
ROIC= =
IF the ROIC is higher than WACC, the value of the firm increases.
IF the firm is unlevered, ROA = ROE = ROIC