Problem 1: Value of Assets

0% Debt/ 25% Debt/ 50% Debt/ 60% debt/ 40% debt/ 0% debt/
100% Equity 75% Equity 50% Equity 40% equity 60% equity 100% equity
Book Value of Debt - 2,500 5,000 6,000 4,000 -
Book Value of Equity 10,000 7,500 5,000 4,000 6,000 10,000

Market Value of Debt - 2,500 5,000 6,000 4,000 -

Market Value of Equity 10,000 8,350 6,700 6,041 7,361 10,000

Pretax Cost of Debt 5.00% 5.00% 5.00% 5.00% 5.00% 5.00%

After-Tax Cost of Debt 3.30% 3.30% 3.30% 3.30% 3.30% 3.30%

Market Value Weights of

Debt 0% 23% 43% 0% 35% 0%
Equity 100% 77% 57% 100% 65% 100%
Levered Beta 0.80 0.96 1.19 0.80 1.09 0.80
Risk-Free Rate 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%
Market Premium 6.0% 6.0% 6.0% 6.0% 6.0% 6.0%
Cost of Equity 9.8% 10.7% 12.2% 9.8% 11.5% 9.8%
Weighted-Average Cost of Capital 9.8% 9.0% 8.4% 9.8% 8.6% 9.8%
EBIT 1,485 1,485 1,485 1,485 1,485 1,485
Taxes (@ 34%) 505 505 505 505 505 505
EBIAT 980 980 980 980 980 980
+ Depreciation 500 500 500 500 500 500
- Capital exp. (500) (500) (500) (500) (500) (500)
+ Change in net working capital - - - - - -
Free Cash Flow 980 980 980 980 980 980

Value of Assets (FCF/WACC) 10,000 10,850 11,700 10,000 11,360 10,000

Tax Rate 34% 34%

Problem 2: Value of Equity and Debt

0% Debt/ 25% Debt/ 50% Debt/ 60% debt/ 40% debt/ 0% debt/
100% Equity 75% Equity 50% Equity 40% equity 60% equity 100% equity

Cash flow to creditors:

Interest - 125 250 300 200 -
Pretax cost of debt 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%
Value of debt:
(Int/Kd) - 2,500 5,000 6,000.0 4,000 -

Cash flow to shareholders:

EBIT 1,485 1,485 1,485 1,485 1,485 1,485
Interest - 125 250 300 200 -
Pretax profit 1,485 1,360 1,235 1,185 1,285 1,485
Taxes (@ 34%) 505 462 420 403 437 505
Net income 980 898 815 782 848 980
+ Depreciation 500 500 500 500 500 500
- Capital exp. (500) (500) (500) (500) (500) (500)
+ Change in net working capital - - - - - -
- Debt amortization - - - - - -
Residual cash flow 980 898 815 782 848 980

Cost of equity 9.80% 10.75% 12.16% 9.80% 11.52% 9.80%

Value of equity (RCF/Ke) 10000 8355 6700 7980 7360 10000

Value of equity plus value of debt 10,000.0 10,854.7 11,700.0 13,979.6 11,360.1 10,000.0

Tax Rate 34% 34%

Problem 3: Business Flows and Financing Effects

0% Debt/ 25% Debt/ 50% Debt/ 60% debt/ 40% debt/ 0% debt/
100% Equity 75% Equity 50% Equity 40% equity 60% equity 100% equity

Pure Business Cash Flows:

EBIT 1,485 1,485 1,485 1,485 1,485 1,485
Taxes (@ 34%) 505 505 505 505 505 505
EBIAT 980 980 980 980 980 980
+Depreciation 500 500 500 500 500 500
-Capital exp. (500) (500) (500) (500) (500) (500)
+Change in net working capital - - - - - -
Free Cash Flow 980 980 980 980 980 980

Unlevered Beta 0.8 0.8 0.8 0.8 0.8 0.8

Risk-Free Rate 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%
Market Premium 6.0% 6.0% 6.0% 6.0% 6.0% 6.0%
Unlevered WACC 9.80% 9.80% 9.80% 9.80% 9.80% 9.80%

Value of Pure Business Flows:

(FCF/Unlevered WACC) 10,001 10,001 10,001 10,001 10,001 10,001

Financing Cash Flows

Interest - 125 250 300 200 -
Tax Reduction 0 43 85 102 68 0

Pretax Cost of Debt 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%

Value of Financing Effect:

(Tax Reduction/Pretax Cost of Debt) 0 850 1700 2040 1360 0

Total Value (Sum of Values of

Pure Business Flows and Financing Effects) 10,001 10,851 11,701 12,041 11,361 10,001
 0% Debt/ 25% Debt/ 50% Debt/ 60% debt/ 40% debt/
100% Equity 75% Equity 50% Equity 40% equity 60% equity
Initial mkt value of equity 10,000 10,000 10,000 6,041 6,041
PVTS 0 850 1700 2040 1360
Mkt value of equity
after announcement 10,000 10,850 11,700 8,081 7,401
Initial # shares 1000 1000 1000 1000 1000
Price per share
after announcement 10 10.85 11.7 8.081 7.401

Total Market Value of Equity 10,000 8,355 6,700 7,980 7,360

Cash Paid Out - 2,500 5,000 6,000.0 4,000.0
# Original Shares 1000 1000 1000 1000 1000
Total Value Per Share 10.00 10.85 11.70 13.98 11.36
 0% debt/
100% equity
6,041
0

6,041
1000

6.041

10,000
-
1000
10.00
5. In this set of problems, is leverage good for shareholders? Why? Is levering/unlevering the firm something that shareholders
themselves? In what sense should shareholders pay a premium for shares of levered companies?

Based on this case, the leverage not bring a good for shareholders. It shows that the number of value per share is decreasing.
be a negative impact to value for shareholder in their return. Shareholders cant do levering/unlevering for themselves. The firm
(Chief Finance Officer has responsibility on levering/unlevering. Based on this case, shareholders pay a discount for shares of l
debt decreased the value of the shares
irm something that shareholders can do for
es?

f value per share is decreasing. and it would

evering for themselves. The firm or the CFO
ers pay a discount for shares of levered when
 Koppers Company, Inc.

Before After
Recapitalization Recapitalization

Additional Debt 1,565,686

Book Value Balance Sheets
Net working capital $ 212,453 $ 212,453
Fixed assets 601,446 601,446
Total assets 813,899 813,899

Long-term debt 172,409 1,738,095

Deferred taxes, etc. 195,616 195,616
Preferred stock 15,000 15,000
Common equity 430,874 (1,134,812)
Total capital $ 813,899 813,899

Market-Value Balance Sheets

Net working capital $ 212,453 $ 212,453
Fixed assets 1,618,081 1,618,081
PV debt tax shield 58,619 590,952
Total assets 1,889,153 $ 2,421,486

Long term debt 172,409 1,738,095

Deferred taxes, etc. - -
Preferred stock 15,000 15,000
Common equity 1,701,744 $ 668,391
Total capital $ 1,889,153 $ 2,421,486

Number of shares 28,128 28,128

Price per share $ 60.50 23.76

Value to Public Shareholders

Cash received $ - 1,565,686
Value of shares $ 1,701,744 668,391
Total $ 1,701,744 2,234,077
Total per share $ 60.50 79.43