Neas-Seminars

Homework 8.1 Question


http://33771.hs2.instantasp.net/Topic2418.aspx

By jen11 - 6/15/2005 1:00:35 PM

Is Part A as simple as accepting the individual projects with an expected return greater than 15%?

For Part B, would you use the Expected Stock Return formula and accept projects greater than 15%? For example, project #1, r = 8 + 0.5(7) = 11.5%, so do not accept this project? For project #2, 8+0.8(7) = 13.6, don't accept?

 
By ypollack - 8/29/2016 12:48:51 AM

I would appreciate some clarification. The value of the firm is $48 * 500,000 = $24,000,000. The value of the debt is $5,415,789.74. The value of the firm equals the debt plus the equity (in Brealey-Myers-Allen tenth edition page 216, the asset value equals the debt plus the equity). Shouldn't the equity equal $24,000,000 minus $5,415,789.74 which equals $18,584,210.26?