2024 – This needs to be done in Excel please PROBLEM 14 11 BASED ON CHAPTER 14 WACC AND
Homework help—This needs to be done in EXCEL – 2024
This needs to be done in Excel please.
PROBLEM 1411 BASED ON CHAPTER 14: WACC AND MODIGLIANI & MILLER EXTENSION MODELS WITH GROWTH ASSUMPTIONS
Consider the entrepreneur described in Section 14.1 (and referenced in Tables 14.1–14.3). Suppose she funds the project by borrowing $750 rather than $500.
TABLE 14.1 The Project Cash Flows
Date 0 
Date 1 


Strong Economy 
Weak Economy 
−$800 
$1400 
$900 
TABLE 14.2 Cash Flows and Returns for Unlevered Equity
Date 0 
Date 1: Cash Flows 
Date 1: Returns 


Initial Value 
Strong Economy 
Weak Economy 
Strong Economy 
Weak Economy 


Unlevered equity 
$1000 
$1400 
$900 
40% 
−10% 
TABLE 14.3 Values and Cash Flows for Debt and Equity of the Levered Firm

Date 0 
Date 1: Cash Flows 


Initial Value 
Strong Economy 
Weak Economy 
Debt Levered equity 
$500 E = ? 
$525 $875 
$525 $375 
Firm 
$1000 
$1400 
$900 
a. According to MM Proposition I, what is the value of the equity? What are its cash flows if the economy is strong? What are its cash flows if the economy is weak?
b. What is the return of the equity in each case? What is its expected return?
c. What is the risk premium of equity in each case? What is the sensitivity of the levered equity return to systematic risk? How does its sensitivity compare to that of unlevered equity? How does its risk premium compare to that of unlevered equity?
d. What is the debtequity ratio of the firm in this case?
e. What is the firm’s WACC in this case?
PROBLEM 1418 BASED ON CHAPTER 14: WACC AND MODIGLIANI & MILLER EXTENSION MODELS WITH GROWTH ASSUMPTIONS
In mid2012, AOL Inc. had $100 million in debt, total equity capitalization of $3.1 billion, and an equity beta of 0.90 (as reported on Yahoo! Finance). Included in AOL’s assets was $1.5 billion in cash and riskfree securities. Assume that the riskfree rate of interest is 3% and the market risk premium is 4%.
a. What is AOL’s enterprise value?
b. What is the beta of AOL’s business assets?
c. What is AOL’s WACC?
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