6215:corporate Financial Management Homework

6215:Corporate Financial Management                                                                                  Vinay. Kolla

Home Work 6        ht8453

Question 1

Part a:

IRR for project A

[pic 1]

IRR for project B

[pic 2]

We should choose project B because the internal rate of return is higher than IRR for project A.

Part b:

NPV for project A

[pic 3]

NPV for project B

[pic 4]

Based on the NPV values we have to select project A as it has a higher net present value.

Question 2

Part a:

For google

Unlevered Beta= Levered Beta/[1+(1-0.35)*D/E]

        =0.9/[1+(1-0.35)*0.0758]

        =0.857

For MSFT

Unlevered Beta= Levered Beta/[1+(1-0.35)*D/E]

        =0.69/[1+(1-0.35)*0.2789]        

        =0.584

Part b:

Unleveraged Beta (Industry’s Asstes Beta)=(0.857+0.584)/2

        =0.72

Levered Beta= Unlevered Beta*[1+(1-0.35)0.25]

        =0.75*[1+(1-0.35)*0.25]

        =0.87

Hence the leverage beta for the new firm will be 0.87

Question 3        

Part a:

Re =Rf  + Bleveraged (Rm -Rf)

     =0.0814

WACC=D/(D+E) *Rd *(1-tc)+E/(D+E)Re

            =0.0763

Part b: