Question

SHOW WORK FOR CALCULATIONS

1. Complete questions: Define each of the following terms:

a. Operating plan; financial plan

b. Spontaneous liabilities; profit margin; payout ratio

c. Additional funds needed (AFN); AFN equation; capital intensity ratio; self-supporting growth rate

d. Forecasted financial statement approach using percentage of sales e. Excess capacity; lumpy assets; economies of scale

f. Full capacity sales; target fixed assets to sales ratio; required level of fixed assets

2. Complete problem: Premium for Financial Risk XYZ, Inc. has an unlevered beta of 1.0. They are financed with 50% debt and has a levered beta of 1.6. If the risk-free rate is 5.5% and the market risk premium is 6%, how much is the additional premium that XYZ, Inc. shareholders require to be compensated for financial risk? Show your work.

Answer 1

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Note: I have answered question 2. As per HOMEWORKLIB RULES, experts are restricted to the limit of 1 question. Please don’t down vote and ask the remaining questions in a seperate part. I will be more than happy to help!!

Answer(2):

Given, XYZ beta = 1.0

Since unlevered beta = 1.0, we calculate the return for this beta

=> E(r)_UL = rF + * Risk Premium = 5.5% + 1 * 6% = 11.5%

For levered beta of 1.6,

=> E(r)_L = rF + * Risk Premium = 5.5% + 1.6 * 6% = 15.1%

=> Extra premium to compensate risk = 15.1% - 11..5% = 3.6%