4. Would a decline (or an increase) in the WACC cause changes in the IRR ranking of mutually exclusive projects?

IRR:

The internal rate of return is the discount rate that equates the net present value of a project to zero. If a project has
normal cash flows (i.e., cash outflows initially follow by cash inflows), then there is a unique internal rate of return.

Answer and Explanation:

No, a decline in WACC would not change the IRR ranking of mutually exclusive projects.

In the calculation of internal rate of return, the process is to find the discount rate that equates the net present
value of the project to zero. In this calculation, information on WACC is not required. Therefore, changes to WACC
do not affect the internal rate of return for a project, and consequently do not affect the IRR ranking of mutually
exclusive projects.

If the projects are ranked using modified internal rate of return (MIRR), then changes in WACC would affect the
ranking of projects, because the WACC is used to discount negative cash flows in the calculation of MIRR.

5. a.Explain what a residual dividend policy implies, illustrating your answer with a table showing how different
investment opportunities can lead to different dividend payout ratios.

b.Think back to Chapter 13 where we considered the relationship between capital structure and the cost of capital.
If the WACC-versus-debt-ratio plot was shaped like a sharp V, would this have a different implication for the
importance of setting dividends according to the residual policy than if the plot was shaped like a shallow bowl (a
flattened U)?

.Residual policy implies that dividends are paid out of whatever is left of earnings or you can say net income. If an
organization is interested in investing the retained earning then whatever is left after investment will be distributed
to the shareholders.

If an investment opportunity is high, then the payout ratio will be low or in some cases it could be high as well. If it is
a moderate or balanced one then it will have a balanced effect on the payout ratio as well. And if the investment
opportunity is low or you can say that a low capital budget is required then a large or high amount Is still available to
shareholders depending on the circumstances.
6. duval corp. is comparing two different capital structures. Plan I would result in 13,000 shares...
Haskell Corp. is comparing two different capital structures. Plan I would result in 13,000 shares of stock and
$130,500 in debt. Plan II would result in 10,400 shares of stock and $243,600 in debt. The interest rate on the debt
is 10 percent.
a. Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $56,000. The
all-equity plan would result in 16,000 shares of stock outstanding. Which of the three plans has the
highest EPS? The lowest?

Interest plan for plan I = 10% of debt (plan I)

Interest plan for plan I = 10% x 130,500
Interest plan for plan I = 13,050

Interest plan for plan II = 10% of debt (plan II)

Interest plan for plan II = 10% x 243,600
Interest plan for plan II = 24,360

EPS for plan I = (net income/ shares of stock outstanding)

EPS for plan I = 42,950/ 13,000
EPS for plan 1 = 3.30

EPS for plan II = (net income/ shares of stock outstanding)

EPS for plan II = 31,640/10,400
EPS for plan II = 3.04

EPS for all equity plan = (net income/ shares of stock outstanding)
EPS for all equity plan = 56,000/ 16,000
EPS for all equity plan = 3.50

Detail Plan I ($) Plan II ($) All- Equity ($)

EBIT 56,000 56,000 56,000
Less: Interest -13,050 -24,360 0
Net income 42.950 31,640 56,000
EPS 3.30 3.04 3.50
Highest EPS equity plan of $3.50 and lowest EPS is plan II of $3.04

b. In part (a), what are the break-even levels of EBIT for each plan as compared to that for an all-equity plan?
Is one higher than the other? Why?
EPS = (EBIT – RdD)/Shares outstanding

EBIT/16,000 = [EBIT –Rd x(D)]/ Shares outstanding

EBIT/16,000 = [EBIT -.10x(130,500)]/13,000
EBIT/16,000 = [EBIT – 13,050]/13,000
13,000EBIT = 16,000EBIT – 13,050 x16,000
3,000 EBIT = 208,800,000
EBIT = 208,800,000/3,000
EBIT = 69,600
Breakeven level of EBIT between all-equity and plan I

EBIT/16,000 = [EBIT –Rd x(D)]/ Shares outstanding

EBIT/16,000 = [EBIT -.10x(243,600)]/10,400
EBIT/16,000 = [EBIT – 24,360]/10,400
10,400EBIT = 16,000EBIT – 24,360 x16,000
5,600 EBIT = 389,760,000
EBIT = 389,760,000/5,600
EBIT = 69,600

Breakeven level of EBIT are same

c. Ignoring taxes, at what level of EBIT will EPS be identical for Plans I and II?
[EBIT –Rd x(D)]/ Shares outstanding = [EBIT –Rd x(D)]/ Shares outstanding
[EBIT -.10x(130,500)]/13,000 = [EBIT -.10x(243,600)]/10,400
EBIT = 208,800,000/3,000 EBIT = 389,760,000/5,600
EBIT = 69,600 EBIT = 69,600

Break – even level of EBIT is same

d. Repeat parts a, b, and c assuming that the corporate tax rate is 40 percent. Are the break-even levels of
EBIT different from before? Why or why not?
Detail Plan I ($) Plan II ($) All- Equity ($)
EBIT 56,000 56,000 56,000
Less: Interest -13,050 -24,360 0
Less: Taxes -17,180 -12,656 -22,400
Net income 25,770 18,984 33,600
EPS 1.98 1.83 2.10
Highest EPS is all equity plan of 2.10 and lowest is plan II of 1.83
(formulas not put here due to showed above)

EPS = [EBIT – RdD) x(1-Tc)/ Shares outstanding]

EBIT (1-Tc)/16,000 = [EBIT-Rd X (D)] x (1-Tc)/ Shares outstanding

EBIT (1-Tc)/16,000 = [EBIT - .10x(130,500] x (1 - .40)/13000
EBIT (1-Tc)/16,000 = [EBIT – 13,050] x.60/13,000/13000
7,800EBIT = (.60EBIT – 7830) x16000
7,800EBIT = 9,600EBIT – 125,280,000
125,280,000 = 1,800EBIT
EBIT = 125,280,000 / 1,800
EBIT = 69,600

EBIT (1-Tc)/16,000 = [EBIT-Rd X (D)] x (1-Tc)/ Shares outstanding

EBIT (1-Tc)/16,000 = [EBIT - .10x(243,600] x (1 - .40)/10,400
EBIT (1-Tc)/16,000 = [EBIT – 24360] x.60/10,400
6240EBIT = (.60EBIT – 14616) x16000
6240EBIT = 9,600EBIT – 233856000
233856000 = 3360EBIT
EBIT = 233856000/3360
EBIT = 69,600

= [EBIT-Rd X (D)] x (1-Tc)/ Shares outstanding = = [EBIT-Rd X (D)] x (1-Tc)/ Shares outstanding
= [EBIT - .10x(130,500] x (1 - .40)/13000= [EBIT - .10x(243,600] x (1 - .40)/10,400
EBIT = 125,280,000 / 1,800 EBIT = 233856000/3360
EBIT = 69,600 EBIT = 69,600
The break even levels of EBIT does not vary and this is because incomes of all three plans are reduced by the
addition of taxes by same percentage. There is no difference before and after tax.

Perusahaan a dan l
Pacific Dana and MAAKL are identical except for their financial leverage ratios and the interest rates they pay on debt.
Each has $20 million in invested capital, has $4 million of EBIT, and is in the 40% corporate tax bracket. Pacific Dana,
however, has a debt-to-capital ratio of 50% and pays 12% interest on its debt, whereas MAAKL has a 30% debt-to-
capital ratio and pays only 10% interest on this debt. Neither firm uses preferred stock in its capital structure.

a. Calculate the return on invested capital (ROIC) for each firm.

b. Calculate the return on equity (ROE) for each firm.
c. Observing that Pacific Dana has a higher ROE, MAAKL’s treasurer is thinking of raising the debt-to-capital ratio
form 30% to 60% even though that would increase MAAKL’s interest rate on all debt to 15%. Calculate the
new ROE for MAAKL.

Jawaban:

Diketahui pada kondisi awal, komposisi modal (capital) antara Pacific Dana dan MAAKL adalah sebagai berikut:

Pacific Dana MAAKL

Debt / Capital 50% Debt / Capital 30%
Tax Rate 40% Tax Rate 40%
Invested Capital $20,000,000 Invested Capital $20,000,000
Debt $10,000,000 Debt $ 6,000,000
Interest Rate 12% Interest Rate 10%
Equity $10,000,000 Equity $14,000,000
EBIT $ 4,000,000 EBIT $ 4,000,000

Pada kondisi selanjutnya, MAAKL mengubah komposisi menjadi:

Pacific Dana MAAKL

Debt / Capital 50% Debt / Capital 60%
Tax Rate 40% Tax Rate 40%
Invested Capital $20,000,000 Invested Capital $20,000,000
Debt $10,000,000 Debt $12,000,000
Interest Rate 12% Interest Rate 15%
Equity $10,000,000 Equity $ 8,000,000
EBIT $ 4,000,000 EBIT $ 4,000,000

Perubahan komposisi Capital MAAKL

a. Nilai ROIC untuk tiap-tiap perusahaan:

𝐸𝐵𝐼𝑇(1 − 𝑇) $4,000,000(1 − 0.4)

𝑅𝑂𝐼𝐶𝑃𝑎𝑐𝑖𝑓𝑖𝑐 𝐷𝑎𝑛𝑎 = =
𝐼𝑛𝑣𝑒𝑠𝑡𝑒𝑑 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 $20,000,000

𝑹𝑶𝑰𝑪𝑷𝒂𝒄𝒊𝒇𝒊𝒄 𝑫𝒂𝒏𝒂 = 𝟎. 𝟏𝟐 = 𝟏𝟐%

𝐸𝐵𝐼𝑇(1 − 𝑇) $4,000,000(1 − 0.4)

𝑅𝑂𝐼𝐶𝑀𝐴𝐴𝐾𝐿 = =
𝐼𝑛𝑣𝑒𝑠𝑡𝑒𝑑 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 $20,000,000

𝑹𝑶𝑰𝑪𝑴𝑨𝑨𝑲𝑳 = 𝟎. 𝟏𝟐 = 𝟏𝟐%

b. Nilai ROE untuk tiap-tiap perusahaan:

Untuk Pacific Dana

𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 = 0.12 ∗ 𝐷𝑒𝑏𝑡 = 0.12 ∗ $10,000,000 = $1,200,000

𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 = (𝐸𝐵𝐼𝑇 − 𝐼)𝑥(1 − 𝑇)

𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 = ($4,000,000 − $1,200,000)𝑥(1 − 0.4) = $1,680,000

𝑵𝒆𝒕 𝑰𝒏𝒄𝒐𝒎𝒆 $𝟏, 𝟔𝟖𝟎, 𝟎𝟎𝟎

𝑹𝑶𝑬 = = = 𝟏𝟔. 𝟖𝟎%
𝑬𝒒𝒖𝒊𝒕𝒚 $𝟏𝟎, 𝟎𝟎𝟎, 𝟎𝟎𝟎

Untuk MAAKL
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 = 0.10 ∗ 𝐷𝑒𝑏𝑡 = 0.10 ∗ $6,000,000 = $600,000

𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 = (𝐸𝐵𝐼𝑇 − 𝐼)𝑥(1 − 𝑇)

𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 = ($4,000,000 − $600,000)𝑥(1 − 0.4) = $2,040,000

𝑵𝒆𝒕 𝑰𝒏𝒄𝒐𝒎𝒆 $𝟐, 𝟎𝟒𝟎, 𝟎𝟎𝟎

𝑹𝑶𝑬 = = = 𝟏𝟒. 𝟓𝟕%
𝑬𝒒𝒖𝒊𝒕𝒚 $𝟏𝟒, 𝟎𝟎𝟎, 𝟎𝟎𝟎

Nilai-nilai tersebut dapat dilihat dari rangkuman di bawah ini:

EBIT EBIT(1-T) ROIC Interest Net Income ROE

Pacific Dana $ 4,000,000 $ 2,400,000 12% $ 1,200,000 $ 1,680,000 16.80%
MAAKL $ 4,000,000 $ 2,400,000 12% $ 600,000 $ 2,040,000 14.57%
c. Nilai ROE yang baru untuk MAAKL:

Untuk MAAKL (setelah perubahan komposisi capital)

𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 = 0.15 ∗ 𝐷𝑒𝑏𝑡 = 0.15 ∗ $12,000,000 = $1,800,000

𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 = (𝐸𝐵𝐼𝑇 − 𝐼)𝑥(1 − 𝑇)

𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 = ($4,000,000 − $1,800,000)𝑥(1 − 0.4) = $1,320,000

𝑵𝒆𝒕 𝑰𝒏𝒄𝒐𝒎𝒆 $𝟏, 𝟑𝟐𝟎, 𝟎𝟎𝟎

𝑹𝑶𝑬 = = = 𝟏𝟔. 𝟓𝟎%
𝑬𝒒𝒖𝒊𝒕𝒚 $𝟖, 𝟎𝟎𝟎, 𝟎𝟎𝟎

Nilai-nilai tersebut dapat dilihat dari rangkuman di bawah ini:

EBIT EBIT(1-T) ROIC Interest Net Income ROE

Pacific Dana $ 4,000,000 $ 2,400,000 12% $ 1,200,000 $ 1,680,000 16.80%
MAAKL $ 4,000,000 $ 2,400,000 12% $ 1,800,000 $ 1,320,000 16.50%

Parameter yang berubah setelah pembaharuan pada komposisi capital MAAKL