Neas-Seminars

Corporate finance module 24: Homework Assignment


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By NEAS - 10/30/2010 7:59:36 AM

Corporate Finance, Module 24: “Financial Analysis and Planning”

 

Corporate finance module 24: Homework Assignment

 

(The attached PDF file has better formatting.)

 

Economic value added

 

ABC Insurance Company is financed by $500 million of equity and $500 million of debt. (The debt is through a holding company; this makes no difference for the financial analysis.)

 

The yield to maturity on ABC’s debt equals its coupon rate of 8% per annum. The risk-free rate is 5% per annum, the market risk premium is 7%, and ABC has a CAPM beta of 1.000. The corporate tax rate is 35%.

 

In 20X1, ABC paid $40 million in interest and earned $75 million in accounting income.

 


1.       What is ABC’s after-tax debt payment?

2.       What is ABC’s after-tax debt plus net income?

3.       What is ABC’s weighted average cost of capital?

4.       What is ABC’s economic value added (EVA)?

 

 
By NEAS - 4/30/2019 1:38:41 PM

 
Tyler - 3/5/2011 4:53:13 PM
Forgive me but what is the debt payment?

I had assumed this would be the amount you pay to debtors, i.e. interest. This is given as $40M, though, so it seems strange to me that we would be asked to provide it.

40 is pre-tax