Quick question for TVM i’ve reset my calculator and have done everything. This is a problem to find the PV of debt for WACC calculation. Problem out of CFAI FV = 10 M, PMT = 400,000, N = 10, i/y = 13.65 …Calc PV the book gives 7,999,688 I keep getting 5,169,814.37 anyone have any feedback?
numbers do not look right. you won’t get that PV with given input. Please post the complete Q.
PV=-4,896,931.505
Trumpit Resorts Company currently has 1.2M CSO, and stock has beta of 2.2. It also has 10M Face value of bonds that have 5 years remaining to maturity and 8% coupon with semiannual PMT and are priced to yield 13.65%. Trumpit has learned that it can issue new Common stock at $10 a share. The current risk free rate of interest is 3% and expected market return is 10%. If trumpit issues up to $2.5 M of new bonds , the bonds will be priced at par and have a yield of 13.65%, if it issues bonds beyond $2.5 M the expected yield will be 16%. Trumpits marginal tax rate is 30%. If trumpit raises $7.5M of new capital while maintaining a the D/E ratio, Its WACC is closest to A. 14.5% B. 15.5% C. 16.5% D. 17.5% …trying to calculate the PV of debt to calculate the wieghts and the books PV is completely different from what im getting
CSO?
Common Shares Outstanding
Did you remember to use after tax cost of debt?
Hi chung.da.neu, Your problem is you are not using the right I/Y value. It should also be the semi annual rate. So use FV = 10 M, PMT = 400,000, N = 10, I/Y = 13.65/2=6.83 …you will get PV = 7,999,688 Hope this helps. Sanket.
You do not need to calculate PV of bond. This is what i got total capital = 2.5+5+12 = 19.5M Now, sum weight times respected cost of capital [Use CAMP, k to get cost of equity.] (2.5/19.5) * .01365 + (5/19.5) *0.16 + (12/19.5) * 0.185 = 17.16…close to Ans D?
Apologies…forgot to put TAX total capital = 2.5+5+12 = 19.5M Now, sum weight times respected cost of capital [Use CAMP, k to get cost of equity.] (2.5/19.5) * .01365 *(1-30%)+ (5/19.5) *0.16*(1-30%) + (12/19.5) * 0.185 = 15.4… Ans B?
i have been doing that…somethings def wrong with my calculator answer is B
… ignore …
If it can issue stock at $10, then that’s the stock market value now, equity is therefore 1.2M*10=12M PV of debt: N=10,I/Y=13.65/2, PMT=400K, FV=10M cpt PV=7,999,687.64 Current D/E=7,999,687.64/12M=66.67%, the weight of debt being 7,999,687.64/(7,999,687.64+12M)=40%, and weight of equity being 60% To keep the current D/E ratio, the 7.5M must be raised 40% through debt, 60% through equity, hence 3M in debt, 4.5M in equity. Required return for equity: 3%+2.2*(10%-3%)=18.4% The cost would be 40%*(1-tax rate)*16%+60%*18.84=4.48+11.04=15.52%, that would be B, right?
What’s the significance of the words “maintaining the debt/equity ratio” in the question? What was the original debt/equity ratio Edit = map1 to the rescue again. cheers.
they did not give D/E i meant to type maintain same…My TVM is def F’d up.
map1 you’re a genius, just reading that explanation got me more than excited (yeah, i’m in proper nerd mode)
---------- Problem out of CFAI FV = 10 M, PMT = 400,000, N = 10, i/y = 13.65 …Calc PV the book gives 7,999,688 I keep getting 5,169,814.37 ---------- Chung, you probably did not take semiannual i/y…13.65/2?
chung.da.neu Wrote: ------------------------------------------------------- > they did not give D/E i meant to type maintain > same…My TVM is def F’d up. The current debt to equity ratio is 66.67%, which is a sort of saying for each $1 of equity, the company has $0.6667 debt on the BS. Current D/E=7,999,687.64/12M=66.67% The company wants to maintain the same D/E ratio, so the change in D has to be proportional with the change in E, and the weight of D and weight of E has to remain the same after the company raised capital. weight of debt + weight of equity = 1 wd=7,999,687.64/(7,999,687.64+12,000,000)=40%, we= 1-40%=60%
This is exactly what im inputting FV = 10M, PMT 400,000, I/y = 6.825, n = 10 and do not arrive at 7,999,688 anyone have suggestions with how to reformat to get proper TVm again?
Reset it, whack it on your palm 4 times, and try again. BA II Plus?